Is a more circumspect approach to DPAs warranted?

By 3rd September 2019 General News

Corporate Crime Analysis: Quinton Newcomb and Shiv Haria-Shah, Barristers and Directors at Fulcrum Chambers, explore what the SFO deferred prosecution agreements (DPAs) to date and associated prosecutions of individuals tell us about the current state of corporate criminal law in the UK.

DPAs have been around for over five years in the UK. In that time, the SFO has entered into five DPAs (Standard Bank, 2015; Sarclad, 2016; Rolls Royce, 2017; Tesco, 2017; and Serco Geografix Ltd, 2019). The sums of money involved in these resolutions have been significant and there are doubtless a number of others in the pipeline.

Our DPA regime was largely influenced by the US model and a number of OECD countries have taken inspiration from us. Unlike in the US, however, UK regulators do not have available to them non-trial resolutions such as declinations with disgorgement or non-prosecution agreements. Furthermore, our DPA regime involves an enhanced degree of judicial oversight, which would be considered unusual by US attorneys.

Corporate criminal liability in the UK (with the exception of ‘failure to prevent’ offences) can only be attributed through the application of the ‘identification principle.’ That is to say, that a company can only be convicted of a criminal offence through the ‘acts and state of mind’ of an individual who represents the company’s ‘directing mind.’

The recent Corporate Co-Operation Guidance (issued by the SFO) (guidance) reiterates the previous DPA guidance that, when the SFO is considering a company’s cooperation, it will expect the company to disclose witness accounts (recordings, notes, transcripts) and documents shown to witnesses. The guidance makes clear that privilege is not to be asserted lightly and companies asserting privilege will be expected to provide certification by independent counsel and provide itemised ‘privilege logs’ with reasons. The DPAs to date have, in most cases, involved the relevant corporate waiving privilege over potentially incriminating documents. It is striking that, even with such material available to them, the SFO has failed to successfully prosecute, following a jury trial, a single individual associated with a DPA.

While potential benefits exist for corporates in entering a DPA, for example in relation to a degree of certainty and the avoidance of the consequences of criminal convictions, both reputational and practical (for example, by avoiding mandatory debarment), the developing theme of failures to bring successful convictions against individuals to date gives rise to a number of questions, including:

  • whether corporates, along with their legal advisors, are giving sufficient and careful consideration to the prospects of conviction before entering into the process (including taking the decision to waive privilege) to secure a DPA
  • whether the SFO is giving sufficient and careful consideration to the prospects of conviction before presenting criminal charges against a company
  • whether supervising judges are being presented with sufficient and appropriate material as part of a meaningful supervisory process. For example, while no application to approve the terms of an agreement can be determined without an appropriate declaration by an investigator and the subject of the DPA, given that individual defendants do not have locus at the hearings at which DPAs are approved, the guidance and code might properly be updated explicitly to require for the provision to the court of information/evidence tending away from guilt as well as towards, specifically in relation to the issue of attribution
  • given that DPAs are not available to individuals in the UK, whether a two-tier system of criminal justice is emerging where corporates, in the course of making decisions which they might consider to be in the best interests of its shareholders, are throwing individuals (who face prison-time rather than financial penalties alone) ‘under the bus’?

What approach should corporates and their advisors take when it comes to considering the position of individuals?

While these outcomes are undeniably damaging to the SFO in terms of its ability or at least the perception of its ability successfully to prosecute serious and complex financial crime, they also risk damaging the reputation of corporates and their professional advisors. The criminal justice system as whole risks damage if DPAs come to be perceived as nothing more than prudent and commercial ‘cosy’ deals between the SFO and large corporations, notwithstanding the very substantial financial penalties being agreed as part of the process; the new regime may come to be considered redolent of controversial SFO regimes of the past.

The benefits of DPAs have been trumpeted by the SFO and certain corporates, particularly those who rely heavily on public procurement contracts, for example, will of course have greater incentives to avoid criminal convictions than most. However, the decision to enter into the process of seeking a DPA should not be treated as the default position. It should be considered carefully as one of a number of options which may be open to the SFO and a company in the circumstances.

Entering into a DPA has broader consequences than might be apparent from the guidance or DPA Code of Practice. For example, there are question marks over whether, in reality, significant reputational advantages are gained by those agreeing to a DPA in circumstances where the prosecution of employees in leadership positions within a corporate are subsequently covered in detail by the press.

Good advice is practical and strategic advice. When considering the decision as to whether or not to seek to enter into a DPA, corporates and their professional advisors should focus on the nature and quality of the available evidence against its directing minds, and how the evidence would be likely to play out before a jury – which means practitioners with trial experience, and in particular those who have acted for corporates, have a significant advantage at this stage. Without knowing the likelihood of—(a) a charge being laid against the company; and (b) a conviction after trial, it is impossible for a company to make a full-informed decision.

There is very little written about the SFO’s track record in successfully securing corporate convictions following contested jury trials. In summary:

  • the following recent cases involved guilty pleas—(i) Sweet Group; (ii) FH Bertling; and (iii) Alstom Power Limited
  • the charges against Barclays were dismissed before trial
  • Smith and Ousman, a Sussex based printing company, was found guilty after trial and fined £1.3m
  • Alstom Network UK Limited was acquitted of 3 out of 4 charges and is awaiting sentence in respect of a conviction which was secured in the absence of its directing minds

Companies and their advisers are entitled to take this track record into account as part of their decision-making process.

In short, the increasingly well-publicised and vivid trend, for companies agreeing DPAs in respect of individuals who are proven innocent of the associated criminality, should make UK corporates and professional advisors sit up and critically evaluate much of the rhetoric and seemingly accepted wisdom as to how companies should respond to allegations of financial crime.

How can corporates and their advisors be confident that there has been a rigorous enough assessment as to the adequacy of the evidence in such cases?

Regulators will wish to ensure, particularly in light of recent outcomes, that evidence has been assessed rigorously. Further and similar failures are likely to undermine the entire regime and pose new questions about the future of the SFO.

The process of agreeing a DPA involves a degree of negotiation and a balancing exercise in the first instance between effective cooperation and protecting the company’s position and fundamental rights such as, for example, the right to assert legal professional privilege.

While it will be very difficult for any corporation to be completely confident in the evidence gathering process of the SFO or similar investigating authority, engaging specialist counsel as soon as possible increases the chances of ensuring that appropriate rigour is applied at every stage and that the negotiation occurs in a manner that leads to the most favourable outcome possible for the company.

What are your predictions for how this area of law will develop?

The key area of development to look out for over the next year will be the creation of further failure to prevent offences.

The failure to prevent model has already been adopted in section 7 of the Bribery Act 2010 and through the creation of two offences for failure to prevent tax evasion. Further consultation on expanding the use of the model is taking place. Specifically, in May 2019, in response to the House of Lords Bribery Act Committee Report on the Bribery Act 2010 of March 2019, the government confirmed that a response to the Call for Evidence on Corporate Criminal Liability (which concluded over two years ago) would be ‘issued shortly.’ It seems overwhelmingly likely that the government will announce the extension of the failure to prevent model when they do.

Dependent upon the way that the leadership of the SFO wishes to drive the organisation, this may exponentially increase the number of self-referrals and DPAs, as companies become exposed to potential prosecution for a wider range of financial crimes committed by their associated persons rather than just their directing minds.

On the other hand, as more of the relevant misconduct takes place after the implementation dates, the ability to prosecute the failure to prevent offences will increasingly allow the SFO to avoid the historic difficulties associated with prosecuting companies for substantive offences resulting from the identification principle, and dramatically reduce the litigation risk associated with prosecutions for the SFO; we may also see more companies ‘in the dock’ as a result.

The Director of the SFO has been vocal about the harmonisation of approaches to international anti-corruption efforts and, in particular, reforms to corporate criminal liability. While publicly the idea has been eschewed, it would be surprising, in light of the recent trend of acquittals for directing minds, if some thought had not been given to the possible benefits of opening up the DPA regime to individuals in the same way that they are available to individuals in the US.

While controversial, if individual DPAs were made available to individuals, then it would at least put individuals and their representatives ‘in the room’ when the subject of their alleged misconduct, and the quality of the evidence allegedly proving it, is being considered in the context of a DPA being negotiated by their company and, where necessary:

  • permit them to put forward evidence in their defence in relation to some or all of the alleged misconduct, and
  • provide them the locus to challenge the factual basis upon which their current or former employer is seeking to strike a deal with the SFO

The availability of such measures would, no doubt, have avoided at least some of the recent seemingly incongruous outcomes to SFO prosecutions of individuals.

Indeed, if the current trend continues then the arguments in favour of individual DPAs or, alternatively, a formal opportunity for those accused of misconduct to challenge the factual basis upon which companies seek to enter DPAs before they are finalised, will become increasingly forceful.

Quinton Newcomb and Shiv Haria-Shah are Barristers and Directors at Fulcrum Chambers, where they advise on the full spectrum of financial regulatory work, from assisting in the drafting, implementation and execution of financial crime policies and procedures to conducting internal investigations and responding to enforcement action by domestic and international regulators and prosecutors. They have been and are currently involved in high-profile SFO investigations and have successfully defended corporate defendants at trial.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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