UK Deferred Prosecution Agreements:

On 24 February 2014, deferred prosecution agreements (DPAs) entered into force in the UK, with guidance for prosecutors being issued by the Serious Fraud Office (SFO) and the Crown Prosecution Service (CPS) in a joint Code of Practice for prosecutors (the Code)[1].

DPAs offer corporations a negotiated resolution which avoids the consequences of a criminal conviction. As explained by the SFO director David Green, convicting a company of a corporate crime could cause “collateral damage” to blameless employees and shareholders. Therefore, “deferred prosecution agreements avoid that collateral damage and provide a welcome addition to the prosecutor’s tool kit for use in appropriate circumstances”[2]. However, he stressed that a DPA is “not a panacea”, a corporation cannot use it to buy itself out of trouble and that “unequivocal co-operation” is required. With the SFO’s publicised intention to deal with the “top slice” of economic crime[3] and bring more corporate prosecutions in 2014, will the pain of prosecution and higher sentences incentivise companies to self-report and co-operate, particularly if the gain is limited to sentencing discounts of one third?

DPAs: General points to bear in mind

  • The DPA process is entirely voluntary.
  • At present, the only designated prosecutors able to enter into DPAs are the SFO and the CPS, they are not available to financial services or competition regulators.
  • DPAs will only be available to corporations, not individuals.
  • Companies do not have a right to engage in the DPA process, the decision rests solely with the prosecutor.
  • An invitation to enter into discussions is not a guarantee that a DPA will be offered.
  • Guilt does not have to be admitted, but a statement of facts needs to be agreed with the prosecutor.
  • The judiciary will review and approve, or veto, DPA applications, including the statement of facts and the proposed terms and conditions, such as the financial penalty.
  • The prosecutor responsible for the DPA will need to refer to any concurrent jurisdictional issues, so that the Court can consider why a DPA is in the interests of justice as being fair, reasonable and proportionate.​

What are the tests for entering into a DPA and entering into DPA discussions?

The Code sets out a two-stage test that prosecutors have to apply in determining whether to charge a corporate and then enter into a DPA with it:

  • First, at the evidential stage, prosecutors have to apply the ‘Full Code Test’ in the Code for Crown Prosecutors[4], namely that there is “sufficient evidence to provide a realistic prospect of conviction” or, if that is not met, that there is “at least a reasonable suspicion based upon some admissible evidence” that the corporation committed the offence, and that the full Code test would be met within a reasonable period of time, and
  • Second, at the public-interest stage, prosecutors have to consider if the public interest “would be properly served” by entering into a DPA instead of prosecuting. Prosecutors must balance a list of factors for and against prosecution (considered below).

Although it appears, at first blush, that the “reasonable suspicion” test is a low evidential standard, which may imply that prosecutors could strong-arm companies into DPAs when there are limited prospects of a credible prosecution, it is important to note that there are significant riders attached. The “suspicion” must be both reasonable and based upon admissible evidence, not merely a “hunch” or “hearsay”. There must also be reasonable grounds to believe that within a reasonable period of time there would be sufficient admissible evidence to prosecute, not merely a distant hope – see the SFO press release on Oxford Publishing Limited[5], where difficulties in obtaining evidence from the witnesses and jurisdictions involved, either then or in the future, were significant reasons leading to a civil recovery settlement. Most importantly if a company disputes the assertions being made against it, then it is not obligated to enter into a DPA and it can withdraw, leaving the prosecutor to investigate further and prove the case to the full criminal standard. It must be borne in mind that the majority of the offences to which DPAs apply require that the “directing mind” of the company is implicated in the offending behaviour, which is a significant hurdle for the prosecution to establish corporate criminal responsibility. The notable exception is the corporate failure to prevent bribery offence, under section 7 of the Bribery Act 2010, which although a strict liability offence, is subject to a statutory defence of “adequate procedures”.

It is also of note that long before the charging and DPA decisions are made, prosecutors can only invite companies to discuss DPAs when they have a reasonable suspicion that the company has committed an offence, that the public interest would “likely be met” by a DPA, and that the “full extent” of the alleged offending has been identified. Even in cases involving a self-report by a company, this latter requirement will mean that significant investigations must be carried out to understand the full ambit of the criminality, whether that relates to the jurisdictions involved or the harm caused. This may mean that decisions to discuss DPAs and to enter into them may not be as swift as envisaged, which in turn may affect the prospects of being able to reach global settlements involving other jurisdictions such as the US.

What are the prosecutor’s disclosure duties?

The normal disclosure obligations arising in UK criminal proceedings, namely the duty to disclose “any material which might reasonably be considered capable of undermining the case for the prosecution…or of assisting the case for the accused”, will not apply to DPAs. Instead the disclosure obligations are considerably more nebulous, limited to ensuring that the company is not misled as to the strength of the prosecution case and that negotiations are fair. Companies will not be foreclosed from requesting additional disclosure, but unless that request is reasonable and specific, with the company revealing sufficient details about its case to justify the request, then the prosecutor is under no obligation to consider the request, let alone comply with it.

What is the status of material provided by the company?

The Code provides that both the company and its advisers should provide a warranty in the DPA that the information it provides does not knowingly contain inaccurate misleading or incomplete information. Companies will be liable to prosecution if they know or believe that information that they are supplying is inaccurate, misleading or incomplete.

In the event that a signed DPA is breached, the statement of facts will be able to be used in any subsequent criminal proceedings. If DPA negotiations fail, any draft statement of facts cannot be used in evidence. However material handed over to the prosecutor, such as pre-existing contemporary documents, witness accounts or investigation reports, or other evidence obtained as a result of enquiries into information provided by the company, can all be used in a later prosecution of the company and or individuals.

This will raise particular concerns in respect of legal professional privilege (LPP) and, in the case of employees interviewed by their employers, the privilege against self-incrimination. The SFO and CPS response simply states that the law in relation to LPP is not changed, and that employee interviews would “be governed by the laws of evidence which provide the appropriate protections on a case by case basis”[6].

What are the public interest factors for and against entering into a DPA?

In contrast with the SFO’s now revoked 2009 guidance on self-reporting overseas corruption, which included a virtual presumption of civil settlement, the DPA Code explicitly states that “A prosecution will usually take place unless there are public interest factors against prosecution which clearly outweigh those tending in favour of prosecution”.

The more serious the offence, the more likely that prosecution will be required in the public interest. Indicators of seriousness include the value of any gain or loss; the risk of harm to the public, shareholders or employees; and the stability of financial markets/international trade. The Code sets out a number of additional factors in favour of prosecution such as the corporation having a history of similar conduct; the alleged conduct is part of the corporation’s established business practices; the absence of, or an ineffective, compliance programme; and failure to notify the wrongdoing within reasonable time of the offending conduct coming to light and reporting the wrongdoing knowing or believing it to be inaccurate misleading or false. The last two points are the clearest indicators that companies who uncover criminality but do not notify the authorities early, or who notify the authorities but do not report accurately and fully, will face prosecution.

Additional factors against prosecution include a lack of history of similar conduct; the existence of a proactive compliance programme; the offending represents an isolated action by an individual; the offending is not recent and the company is effectively a different entity from that which committed the offences; and the direct or collateral consequences of a conviction.

However, of all the factors in favour of a DPA, the greatest emphasis is placed upon co-operation: “Considerable weight may be given to a genuinely proactive approach adopted by [the company’s] management team when the offending is brought to their notice”. Co-operation will include not only the reporting of the offending behaviour, but also the stage at which the report is made, taking remedial action, identifying relevant witnesses, and most importantly disclosing their accounts, providing a report of any internal investigation and providing supporting documentation.

Although section 3.3 of the Code states that “The Act does not, and this DPA Code cannot, alter the law on legal professional privilege”, the fact that co-operation credit will be given to those who provide what will in many instances be privileged witness interview accounts and internal investigation reports, may be perceived as an inducement to waive privilege.

What are the likely terms and conditions of a DPA and the likely penalty?

Once the prosecutor is satisfied that both stages have been met, the prosecutor and corporation are required to agree the terms of the DPA, which must be “fair, reasonable and proportionate”. These terms will be decided on a case-by-case basis. However, the DPA will generally include a financial penalty which may take the form of disgorgement of profits, payment of a fine, compensation for victims and costs, and payment of prosecutor’s costs, and a discount on the financial penalty will be applied based on the corporation’s co-operation with the investigation.

When deciding on the financial penalty, consideration will be given to the relevant Sentencing Council Guidelines, which will enter into force on 1 October 2014, but which prosecutors and judges may refer to now for use in DPAs. These guidelines provide for a significant increase in fines in the most serious cases and significant discounts for co-operation. The maximum discount available appears to be one third. Perversely, companies who plead guilty and provide assistance to the authorities may obtain significantly greater discounts, between one half and two thirds[7]. Whether this will be a disincentive for companies to pursue DPAs remains to be seen.

The DPA may also require the implementation of a proactive and effective compliance programme with the appointment of a monitor, whose responsibility will be to assess and monitor the corporation’s internal controls, advise on necessary compliance improvements and report misconduct to the prosecutor. Important safeguards have been introduced by requiring monitors to provide a breakdown of their proposed costs and an indication of the matters on which these will be incurred.

Once the terms of the DPA have been agreed, the prosecutor will file a draft application setting out the DPA and any relevant documentation with the Court for a preliminary hearing, which may be done in private. However, once the Court approves the DPA, it must make a declaration in open court as to the effect of the DPA and the reasons for it. Likewise the prosecutor will, unless prevented by an enactment or order from the Court, publish the DPA along with details of the offence and sanctions on its website.

What are the implications going forward?

Indications are that the most serious offences will still be investigated and prosecuted and that DPAs will only be considered in cases where there is “unequivocal co-operation”, that the factors against prosecution clearly outweigh those in favour. The Code further provides welcome clarification of the relevant factors that prosecutors will be required to look at prior to considering and then entering into DPAs, and places particular emphasis on and incentivisation of co-operation. The Code also highlights that where there is no sufficient evidence for a conviction or for a DPA, that a civil recovery settlement remains an option to consider.

On a practical basis, it remains to be seen whether the threat of prosecution and significantly higher financial penalties will provide much of an incentive for companies to self-report and co-operate in order to receive a DPA and a discount of one third. In the recent past the SFO has suffered a number of significant setbacks and reputational damage, for example the Tchenguizand Dahdaleh cases. Moreover, under the SFO’s new director we have yet to see a concluded corporate prosecution or a prosecution for failure to prevent bribery under the Bribery Act, and apart from the Oxford Publishing Limited case, there have been no civil settlements.

Furthermore it is unclear as to how the judiciary will react and engage with this new regime, having previously indicated reluctance to accept the international agreements reached in cases such as R v. Dougall [2010] EWCA Crim 1048 and R v. Innospec Ltd [2010] EW Misc 7 (EWCC). The increasingly international scope of investigations will require both prosecutors and judiciary to deal with many multi-jurisdictional issues, including international prosecutors and regulators operating on different timetables. Judicial support of the DPA process, with limited exercise of their powers of veto, is essential.

What is clear is that the SFO, despite some significant setbacks, is attempting to up its game. In the recent past charges have been brought against corporates, such as Olympus, the Gyrus Group and Smith and Ouzman Limited. Blockbuster funding has been sought from, and provided by, the government for the LIBOR and Rolls Royce investigations. Investigations are ongoing into a number of high profile companies, such as Autonomy, Alstom, ENRC, and Barclays Bank. Furthermore the SFO has been strengthening its links with regulators and overseas investigators, as well as creating its own intelligence unit. Only time will tell as to how much information comes to the SFO’s attention from these sources or others such as whistle-blowers, but what is clear is that enforcement will inevitably follow.

In the meantime companies need to be vigilant about their bribery, fraud and money laundering risks, ensuring that their policies and procedures are regularly reviewed and updated. It is only by detecting possible offences before others do that proactive measures can then be taken to minimise the risks of a prosecution.