In spite of sustained criticism of the Serious Fraud Office (SFO) over the course of 2013, legislative and sentencing changes being implemented in the UK may cause a noticeable uptick in enforcement against corporates. Deferred prosecution agreements (DPAs) are due to come into force on 24th February - enabling prosecutors and companies to defer criminal proceedings if a statement of facts and punitive conditions can be agreed, and if it is in the interests of justice to do so. Although the DPA Code of Practice on their use has not yet been published, the recently published Sentencing Council definitive guideline (the guidelines) in respect of sentencing corporate offenders for fraud, bribery, and money-laundering offences, indicates a sharp rise in penalties for the most serious cases and significant reductions for companies who self-report and co-operate. The guidelines will only apply to companies sentenced on or after 1st October 2014, but have been published in advance “to be referred to by judges operating the DPA scheme” so as “to inform the level of financial penalty that forms part of a DPA.”
What do the guidelines say?
The Guidelines set out a ten “step” process, which must be followed by the court, for determining the appropriate penalty for corporate offenders. The key steps are as follows:
Steps 1 & 2 – From the outset consideration should be given to ordering compensation or confiscation – with priority being given to compensation rather than any other financial penalty if the offender has limited means. This emphasises the continued focus on recompensing victims and depriving offenders of ill-gotten gains. However it is not always clear how to identify "victims," particularly in corruption cases. See, for example, the Instituto Costarricense de Electricidad (ICE) case brought against Alcatel-Lucent, were the court ruled that ICE was not a victim but essentially a co-conspirator. If confiscation is ordered then this should be taken into account when assessing any other financial penalty.
Step 3 –Determination of the offence category with reference to culpability and harm is the third step. Culpability is broken down into ‘high’, ‘medium’ or ‘lesser’ levels, which require an analysis of the corporation’s role and motivation in the offence. High culpability characteristics include: playing a leading role in organisation, planning of unlawful activity; wilful obstruction of detection (e.g. misleading investigators and destroying evidence); corruption of local or national government officials, ministers or individuals involved in law enforcement; offending over a sustained period; and failure to put in place effective compliance systems. Lesser culpability includes playing a minor role, and making some effort to put bribery prevention measures in place, which are insufficient to amount to an “adequate procedures” defence under Section 7 of the Bribery Act 2010.
Harm is determined by reference to the financial amount obtained or intended to be obtained through the offence, such as the gross profit from a contract obtained by bribery, the gross gain from a fraud, or the amount of money laundered. Alternative measures for both bribery and money-laundering include “the likely cost avoided by failing to put in place appropriate measures to prevent bribery/an effective anti-money laundering programme.” Further, where the actual or intended gain cannot be calculated, a figure of between 10-20% of the relevant revenue may be used, giving financial penalties in the criminal courts greater parity with those imposed by regulators.
Step 4 – Using the high, medium or lesser culpability levels determined at step 3, a starting point within that category range is calculated, 300, 200 or 100% respectively, which is further adjusted by taking into consideration a non-exhaustive list of aggravating or mitigating factors, by which the harm figure is then multiplied.
Aggravating factors include: corporation or subsidiary being set up to commit fraudulent activity; fraudulent activity endemic within corruption; attempting to conceal misconduct; substantial harm caused to the integrity or confidence of markets or national/local governments; and cross-border or cross-jurisdiction offences.
Whilst mitigating factors include: no prior relevant civil or regulatory enforcement action; cooperation with the investigation (including early admissions and voluntary disclosures); no actual loss to victims; voluntarily reimbursing/compensating victims; and little or no actual gain to the corporation from the offence.
In the most serious cases the range of multipliers is between 250-400%, which could result in significantly increased financial penalties for corporate offenders. In the cases of lesser seriousness the range of multipliers is between 20-150%, indicating that matters such as self-reporting and co-operation with the authorities are to be rewarded and incentivised with significant discounts.
Step 5 – Proposes further adjustments to the fine. Factors to consider include: whether the fine fulfils the objectives of punishment, deterrence and removal of gain; the means of the offender; and the impact on the offender’s ability to implement effective compliance programmes and to make restitution to victims. The guidelines also state that it may be an “acceptable consequence” if the fine puts the offender out of business and also that the impact on shareholders is not a relevant factor. This shows a clear intention to ensure that fines are substantial and have a real economic impact on companies.
Steps 6 and 7 – Consider reductions in penalty for factors such as a plea of guilty or the provision of assistance to the authorities. Such assistance can be under the Serious Organised Crime and Police Act 2005 or “any other rule of law by virtue of which an offender may receive a discounted sentence in consequence of assistance given…” As such the common law rules regarding credit for assistance remain, for example credit for receiving a “text” at court. Discounts analogous to a plea of guilty would entitle companies to a discount of up to a third, whilst assistance to the authorities may lead to a reduction of between one half and two thirds, and in exceptional circumstances up to 75%. Such discounts if available would go a long way towards making DPAs an attractive alternative, however at present DPAs will only receive discounts of up to one third. Perversely companies may receive a greater discount if they refuse a DPA, and plead guilty and offer significant assistance.
What are the implications going forward?
The message coming out of the corporate sentencing guidance is clear – the worst corporate behaviour will be punishable with significantly heavier fines, whilst lesser culpability, if combined with active assistance, such as self-reporting and co-operation, will result in significant discounts. Whether this strengthening of the “stick” and fattening of the “carrot” incentivises companies to self-report and assist the authorities in their investigations remains to be seen. Much will depend on the DPA Code for prosecutors, and how this proposes to deal with issues such as legal professional privilege and material passed by companies to prosecutors. Other important factors will include whether the SFO have the adequate resources to progress cases by means of a DPA and whether the judiciary approve the agreements. Nevertheless 2014 is likely to herald the start of a busy period of enforcement against companies.