Corporate Crime analysis: Pam Shearing, director and solicitor, and Rubi Palmieri, solicitor, both at Fulcrum Chambers Ltd, consider the implications of the updated corporate co-operation guidance from the UK Serious Fraud Office (SFO).
The new SFO guidance on corporate co-operation
On 6 August 2019, the SFO published its updated corporate co-operation guidance (the guidance) which forms part of the SFO’s Operational Handbook. The five-page guidance provides further clarification about the measures that the SFO expects from a company when it seeks to self-report suspected wrongdoing and be considered eligible for co-operation credit.
While most of the steps outlined in the guidance are unsurprising and repeat investigative best practices of which companies and their advisers will already be familiar, the guidance fails to provide sufficient clarity over key fundamental issues for companies self-reporting to the SFO, namely:
- what measures a company may take in its own internal investigation before making a decision to self-report, and
- whether privilege must, in reality, be waived in order to obtain corporation credit
These continuing grey areas will be of greatest concern where a company is the subject of a cross-border investigation and is managing the expectations and requirements of ‘co-operative conduct’ in multiple jurisdictions.
How does the updated guidance view co-operation?
The guidance defines co-operation as ‘…providing assistance to the SFO that goes above and beyond what the law requires’. Such assistance would include:
- identifying suspected wrongdoing and criminal conduct, together with the individuals responsible, regardless of their seniority of position in the company
- reporting such conduct to the SFO within a reasonable time of the suspicions coming to light, and
- preserving available evidence and promptly providing it to the SFO in an evidentially sound format
The guidance also contains a non-exhaustive but detailed list of conduct that the SFO consider represent indicators of good cooperative practice for companies, and which will be taken into account by the SFO when considering a charging decision and/or the suitability of deferred prosecution agreements (DPA) in lieu of criminal prosecution.
In a similar vein, the guidance also sets out conduct which the SFO considers to be inconsistent with ‘genuine co-operation’. Such conduct includes:
- protecting specific individuals or unjustifiably blaming others
- putting subjects on notice and creating a danger of tainting evidence or testimony
- adopting silence about selected issues, and
- pursuing tactical delay or adopting information overload
What is the background to this document?
The guidance comes after the SFO’s new director, Lisa Osofsky, departing from the line adopted by her predecessor, and to a degree mirroring the existing provisions in the US, announced in April 2019 that the she would ‘…soon be issuing guidance for corporates and their legal advisers to provide them with added transparency about what they might expect if they decide to self-report fraud or corruption’ to the SFO. The guidance has provided a response to the ongoing confusion among companies and their legal advisers as to what the SFO considered ‘co-operative behaviour’, in light of the limited information that could previously be gleaned from individual lines in SFO speeches and the information available in relation to the DPAs agreed to date.
Some of the specific difficulties for companies have been in relation to question of privilege, the extent to which companies can investigate allegations internally before making a report to the SFO, and the different approaches taken in relation to this in the case of DPAs.
In relation to privilege, in Serious Fraud Office v Standard Bank plc  Lexis Citation 567, the company was not required to waive privilege while in Serious Fraud Office v Rolls-Royce Plc  Lexis Citation 3, the SFO received copies of, among other documents, the interview memoranda and, most recently, in Serious Fraud Office v Serco Geografix Ltd  Lexis Citation 67, the company made a limited waiver of privilege in relation to certain accounting material.
The stage at which self-referrals are made has also diverged substantially—in Standard Bank the initial report was made within days of the evidence of potential misconduct being identified, while in Rolls-Royce the self-reporting process only commenced following a substantial period of internal investigation by the company.
While there will remain a certain amount of uncertainty surrounding these matters which will need to be resolved on a case-by-case basis, the guidance does provide some further clarity on the SFO’s intended approach. Aside from the SFO itself, the current requirements for DPAs from the courts’ perspective was set out by Davis J in Serco last month, when he stated that:
‘…approval will only be given where there is the clearest possible demonstration of integrity on the part of the company concerned once the criminal activity has become apparent. This will require early self-reporting to the authorities, full co-operation with the investigation, a willingness to learn lessons and an acceptance of an appropriate penalty.’
What are the most interesting aspects to the guidance?
While much anticipated and generally well-received by the legal community, many aspects of the guidance do not provide anything new—they set out the best practices that have been previously articulated in earlier SFO public statements and are already well recognised by large companies and their legal advisers.
Prior to the publication of the guidance, the director made public statements indicating that the SFO would require the production of at least interview memoranda which often contain, as she has noted, the ‘first accounts’ from witnesses, before the SFO would consider a company to be co-operating. The guidance picks up on this point and formalises the new stricter approach to this category of material. The guidance cites the Deferred Prosecution Agreements Code of Practice (DPA Code), which has been in force since 2014, noting that ‘…[c]o-operation will include identifying relevant witnesses, disclosing their accounts and the documents shown to them’, however, it then goes further, by stating that, when providing witnesses’ accounts to demonstrate a company’s co-operation, that company ‘…should additionally provide any recordings, notes and/or transcripts of the interview and identify a witness competent to speak to the contents of each interview’.
While the guidance does indicate that companies who choose not to waive privilege and produce witness accounts ‘…will not be penalised by the SFO’, it also simultaneously states that they will not ‘…attain the corresponding factor against prosecution that is found in the DPA Code’—seemingly, failing to waive privilege will not result in any penalisation for a company, yet adopting such practice may mean that a company does not succeed in meeting the requirements for a DPA.
This poses real practical difficulties for companies when engaging with the SFO. Given the SFO’s broad discretion in applying the DPA Code, it provides the SFO with a very significant bargaining chip. It remains to be seen whether, in practice, it is ever possible for companies to persuade the SFO that their case meets the threshold for a DPA without some degree of waiver. The SFO can expect robust legal challenges if co-operative companies who refuse to waive privilege are, in practice, penalised in due course by the SFO refusing to accept that their cases are suitable for resolution through a DPA.
Finally, on the subject of privilege, the SFO states that the ‘…existence of a valid privilege claim must be properly established’ to the extent that a company ‘…will be expected to provide certification by independent counsel that the material in question is privileged’. To those well-versed in significant document review exercises, this is both a time-consuming and costly exercise, with the guidance seemingly seeking to push that cost into the legal budgets of companies rather than the budget of the SFO.
How does it compare to the approach taken by other regulators in terms of corporate co-operation, here and abroad?
The SFO’s guidance is, to some degree, similar to the US Department of Justice’s Corporate Enforcement Policy (CEP) in how the two prosecuting bodies view corporate co-operation. The guidance and the CEP do, however, differ in at least two important aspects leading to a potentials tension as between the co-operation standards expected under each respective system.
Firstly, while, in some circumstances, the CEP creates a presumption that a company which ‘…has voluntarily self-disclosed misconduct in a US Department of Justice’s Foreign Corrupt Practices Act (FCPA) matter, fully cooperated, and timely and appropriately remediated’ will receive a declination (‘A declination pursuant to the FCPA Corporate Enforcement Policy is a case that would have been prosecuted or criminally resolved except for the company’s voluntary disclosure, full co-operation, remediation, and payment of disgorgement, forfeiture, and/or restitution’) the guidance states that:
‘…the nature and extent of the organisation’s co-operation is one of many factors that the SFO will take into consideration when determining an appropriate resolution to its investigation’. The guidance has also made clear that ‘…co-operation—even full, robust co-operation does not guarantee any particular outcome’, and that ‘…no checklist exists that can cover every case.’
Secondly, the two prosecuting bodies differ in their approach to internal investigations which, should a company be facing a cross-border investigation, could potentially create complex issues for the company in trying to ensure that it is considered co-operative in both countries.
The SFO guidance states that companies should consult with the SFO prior to interviewing witnesses or taking any disciplinary action and should further refrain from showing a witness any document that he or she may not have already seen during the course of the interview. Thereafter the company should provide the SFO with witness accounts together with ‘…any recoding, notes and/or transcripts’, and should consider waiving its privilege to benefit from a DPA. Such a position would suggest that the company must ensure that the SFO is kept informed and engaged in the progress of a company’s own internal investigation.
The US authorities, however, adopt a slightly different approach, and do not require such pre-approval before a company interviews potential witnesses—albeit that the company may benefit from consulting the DOJ—and more commonly seek a factual briefing of the issues raised during witness interviews rather than the actual notes of the interview, acknowledging that these would be covered by attorney-client privilege.
Further, the US is generally less prescriptive in how a company should conduct its internal interviews, unlike the SFO guidance which discourages companies from showing witness documents that they have not previously seen, nor inviting the witness to comment on another person’s account of matters.
These issues have also been the subject of a recent decision, United States v Connolly, No.16-CR-370, 2019 WL 2120523 (S.D.N.Y. May 2, 2019, considered in the Southern District of New York), in which the court was critical of the degree of government involvement and directions given to a company as it conducted its own internal investigation, assessing conduct could effectively risk the company’s own internal investigation being ascribed to that of the government.
In this decision, handed down on 2 May 2019, McMahon J determined that the government had effectively ‘…outsourced its investigation’ to the company and its lawyers, instead of conducting its own ‘…substantial parallel investigation to the “internal” investigation’. McMahon J stated that the government ‘…simply gave directions’ to the company and ‘…save[d] itself the trouble of doing its own work’, noting that ‘…internal investigations are commissioned by the board of directors with the results reported to boards of directors—not commissioned by the government with regular reports to the government’.
This differences in the approaches adopted by the US and UK prosecution agencies may therefore cause some difficulties for companies that are subject to cross-border investigations as they seek to juggle the varying interpretations of ‘co-operative conduct’ under both prosecuting systems. This is of particular importance when considering the issue of waiver of privilege and the potential ramifications in the US of disclosing privileged material in the UK during the course of cooperative conduct. The disclosure of privileged material in the UK could thereafter lead to a broader waiver of privilege in respect of the same subject matter in the US. As such, it is important that companies subject to a cross border investigation give serious consideration to the consequential implications of their actions in one jurisdiction upon investigations in another jurisdiction and, as a result, the degree of co-operation that they are willing to provide.
How do you think it is likely to be received/applied in practice?
It is still early to predict how the guidance will work in practice, but it seems to be an indication that under its new leadership the SFO is willing to maintain an open dialogue with companies to facilitate the early resolution of allegations of criminal offences through a negotiated DPA thus avoiding, in appropriate cases, co-operative companies being subjected to long and costly criminal investigations and prosecutions. The guidance does, however, fail to answer satisfactorily all of the outstanding questions regarding the scope of ‘co-operative conduct’, and time will tell as to how reasonable the SFO’s approach to issues such as privilege will be.
What is clear is that there remains no absolute formula to successful self-referral processes and, therefore, no guarantee that such exercises will not result in a prosecution rather than a DPA or a non-criminal disposition. Consequently, companies and their advisors will still need to consider, on a case-by-case basis, the best strategy in relation to the specific set of facts and circumstances that confronts them. Real questions must be asked as to whether, in the particular circumstances, and in light of questions including the strength of the evidence of misconduct existing at the time, it would be in a company’s best interests to self-report, when to do so, what co-operation should look like, and how the company will address some of the more contentious and complex issues such as those relating to privilege.
Interviewed by Evelyn Reid.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.