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Deferred Prosecution Agreements – the perspective from England and Wales

14 Medi, 2016 | Areithiau

Alun Milford, General Counsel, at the Handelsbatt Conference 2016.

I have been asked to speak about the UK’s system of deferred prosecution agreements. I appreciate that this is an audience of compliance professionals, and that you all come to the subject with good background knowledge. But your experience of DPA cases will, I assume, be of the American system. For that reason, I thought I’d start there.

As an outsider to it, two points strike me about it.

  1. They have a simple, clear law on corporate liability. It is based on the idea that the company should be held liable for the actions of their employees in the course of their employment. The seniority of the employee is irrelevant to the question of liability. It follows that, where there is evidence of criminality by an employee in furtherance of his or her employer’s business, corporate liability is simple to establish.
  2. That law on corporate liability has been in place for about hundred years. It means that they have had a long time to confront questions of how corporate defendants are best dealt with in their judicial system, and the idea of deferred prosecution agreements emerged from a prosecutor’s search for a pragmatic and fair way of dealing with a company other than either doing nothing or prosecuting in circumstances where many innocent people – for example, employees who had nothing to do with the criminality the prosecutors were dealing with – stood to be punished by losing their jobs if the effect of the prosecution would be to put the company out of business.

Those observations help inform an understanding of how we have adopted the idea of deferred prosecution agreements into our legal system.

First, before we passed any law allowing deferred prosecution agreements we addressed, at least in part, the question of corporate criminal liability. Our law in England and Wales is based on the idea that a company can only be convicted for the criminality of those who speak and act for the company. Those people, in turn, are made up of the company’s leadership – conventionally understood to mean its directors as opposed to its rank and file employees, although who precisely fits into this leadership category is a question to be determined in accordance both with the precise structure of the company and the purpose of the statute said to have been breached. We call this law the identification principle.

The Bribery Act 2010 left the identification principle undisturbed. It follows that, if the evidence implicates a sufficiently senior person within the company, it can be held criminally liable for offences of bribery or bribery of foreign public officials. Significantly, however, the Act created a whole new form of criminal liability with the offence of a failure by a commercial organisation to prevent bribery. This offence is made out simply if a person associated with a commercial organisation bribes another person intending to obtain or retain business or a business advantage for that organisation. Even with an adequate procedures defence, it is easy to see that we have a simpler route through to liability because we do not need to show fault on the part of a senior person in the company.

With this on the statute book, Parliament turned to look at our options for dealing with corporate offenders. It saw much that was good in the US practice of deferred prosecution agreements. It took those good things and put them into a system that worked for us and our legal system, adapted with a clear emphasis on establishing and maintaining our public’s confidence in any agreements we might enter into.

So, we retain our conventional criminal justice processes for dealing with companies caught up in crime, including corruption. We can investigate them and, if at the end of that investigation we judge that there is sufficient evidence for a realistic prospect of conviction and the public interest warrants a prosecution, we prosecute them. If convicted, they are sentenced by a judge.

But now, when we come to consider whether or not prosecute, we have another option to consider. Our first question is whether our evidential sufficiency test is met. If so, and only if so, we consider the public interest in that prosecution. If the company has co-operated with us by shortening the process of the investigation and assisting us in our cases against the individuals who were themselves responsible for the corrupt conduct, then we might invite them to enter into a deferred prosecution agreement. Under such an arrangement, to which of course the company would agree, we would start criminal proceedings against it but immediately suspend them for a fixed period of time, say three years, during which the company must comply with the terms of the agreement. Typically, it will have to pay compensation and disgorge its profits from the corrupt transaction, it will have to pay a separate penalty, it will have to make improvements in its systems and processes so that it does not allow itself to do the same things again. It will have to promise to continue its cooperation, not just with us but our partners at home and overseas, including the multi-lateral development banks. It will pay our costs. Assuming it keeps to its side of the bargain, at the end of the agreed period of time we will go to court and withdraw the proceedings.

In this way, the company accounts to court for its wrong-doing but in a way that avoids a conviction – a valuable prize to a company.

When passing this law, our government was very concerned to ensure that the public could be confident that we were not entering into a DPA for convenience, for example simply in order to avoid a trial or that we were willing to take a soft line with offending companies. So, under our system, the penalty imposed by a deferred prosecution agreement must by law be broadly comparable with the fine a court would have imposed had the company pleaded guilty on a prosecution. I’ll return to this point.

More significantly, a deferred prosecution agreement has no effect unless and until a judge considers it to be in the interests of justice and that its terms are fair, reasonable and proportionate. If he or she thinks so, they must give reasons for it and, on a deferred prosecution agreement being made, they must make those reasons known at a public hearing. Following that hearing, the prosecutor is then required by law to publish on its website not just the agreement itself but the judge’s reasons for sanctioning it. The public can be confident that this is no rubber stamp exercise, because it will see not just the agreement but the reasons why it was entered into.

The power to enter into DPAs became available to us in February 2014 and we have now entered into two: first, in a case called Standard Bank and secondly, in a case still known in our courts as XYZ. Let me tell you about each of them.

Standard Bank

We investigated the UK subsidiary of a South African Bank called Standard Bank for its failure to prevent bribery in Tanzania by Standard Bank’ Tanzanian subsidiary and two members of that bank’s leadership. The UK and Tanzanian banks had worked together on a deal whereby, for a fee, they raised $600 million for the Tanzanian government on the international money markets. The money for the fee was added to the loan, and paid to the banks from it.

The Tanzanian bank was responsible for selling the deal and the UK bank for raising the money. The initial proposal was that the fee should be 1.4%, but the deal was stalled until the Tanzanian Bank inserted an agent into it, a company called EGMA, which was to receive a fee of 1% of the money to be raised. The bank’s 1.4% fee remained, so that the overall cost to the Tanzanian public purse rose to 2.4% of the funds raised.

What did EGMA do for this fee? We found no evidence of it offering advice, writing reports or attending meetings. However, one of EGMA’s three shareholders had, until very recently, been the head of Tanzania’s financial regulator. A second was a serving commissioner of Tanzania’s tax authority. The only possible reason the Tanzanian bank could have had for inserting EGMA into the transaction was to induce its owners, particularly the senior Tanzanian official, to use their influence to persuade the Tanzanian government to enter into the transaction. Indeed, shortly after EGMA’s introduction to the deal, the Tanzanian government signed off on it. As soon as its $6 million fee was paid to it, EGMA withdrew it in cash.

Very soon thereafter junior staff in the Tanzanian bank who had witnessed some of the events raised their serious concerns with head office of the Standard Bank group in South Africa. They, in turn, instructed lawyers who very quickly reported the problem to the SFO.

We were content that those lawyers reviewed the circumstances of the transaction. They made full disclosure to us of their investigation, including sharing with us the accounts of witnesses they spoke to. The full information the bank gave us greatly assisted us in our own, independent investigation into the transaction, including into whether any of the London-based staff should be prosecuted. In the event, we concluded on the evidence that this was a case of failing to prevent corruption by persons in Tanzania, and we agreed the DPA and secured the judge’s approval to it on that basis.

The agreement was to last for three years and imposed the following requirements on the company:

  1. payment of compensation of $6 million, plus interest;
  2. disgorgement of profits of $8.4 million;
  3. a financial penalty of $16.8 million;
  4. past and future co-operation with the relevant authorities in all matters relating to the conduct subject to the proceedings;
  5. at its own expense, commissioning and submitting to an independent review of its existing anti-bribery controls and policies; and
  6. payment of the SFO’s costs.

XYZ

This was a different kind of case and one in which criminal proceedings arising from its facts remain live. I am therefore limited in what I can say about it at this stage.

XYZ is a UK-based company, most of whose revenues come from exports to Asia. From June 2004 until June 2012 a small but important group of the company’s employees and agents was involved in the systematic offer and/or payments of bribes in winning business overseas. The numbers give you an idea of the scale of the conduct. We examined 74 contracts and identified 28 in which there was specific evidence to suggest that it had been secured as a result of the offer and/or payment of bribes. These 28 contracts resulted in payments to the company of £17.24 million, and the gross profit on those contracts of £6.5 million. This compares with a turnover for the company over that eight year period of £109 million and a gross profit figure of £31.4 million.

The company accepted that until 2012 its compliance systems were inadequate. Indeed, this criminality did not come to light until its US-registered parent company sought to implement its global compliance program within the UK subsidiary. It was in the context of that compliance program that concerns came to light about the way in which a number of contracts had been won.

Thereafter, the company acted quickly. It instructed lawyers to conduct an internal investigation, which resulted in a written report to the SFO. The information it gave us led to our own independent investigation, which the company helped by its continued supply of information to us. The company’s self-report, its fully disclosed internal investigation and its on-going co-operation persuaded us that we were prepared to offer it a DPA. The agreement we came to received judicial approval two months ago.

The agreement will last for at least three years up to a period of five years. The company has accepted the following responsibilities:

  1. disgorgement of gross profits of £6.2 million
  2. a financial penalty of £352,000;
  3. past and future co-operation with the SFO in all matters relating to the conduct under investigation; and
  4. review, maintenance of and reporting to the SFO of its existing compliance programme.

So, what do these cases tell us? First – and we already knew this would be the case – judicial approval of a deferred prosecution agreement is hard-won. Go to our web-site and read the judgments approving the deferred prosecution agreements. You will see the judge’s very careful analysis not just of the facts of the case but of the way in which the company conducted itself when the criminality came to light. He then applied the interests of justice test to those facts, referring as he went along to the Code of Practice on Deferred Prosecution Agreements, before then considering the terms of the proposed agreements.

In the Standard Bank case, he pointed to four factors when considering the interests of justice: the nature and seriousness of the offending; the high level of co-operation we had been given; the bank’s hitherto good record on bribery, despite some enforcement action taken by regulators in 2011 for failures in its anti-money laundering procedures which had led to significant enhancements in those policies, procedures and processes; and a change in ownership which meant that the organisation in its current form was effectively a different entity from that which committed the offence. In XYZ, the judge took into account broadly similar considerations: but referred also to the importance of incentivising the exposure of and self-reporting of corporate wrongdoing; and the impact of a conviction on innocent employees and others.

Secondly, those important considerations of incentivising self-reporting and shielding from punishment those people who had nothing to do with the criminality helped secure approval of the DPA in XYZ’s case. Whereas Standard Bank had to account for a single offence of failing to prevent a bribe (albeit a very serious one), XYZ had to account for an eight year course of systemic bribery which the judge described as grave. Like Standard Bank, it had co-operated fully with us and taken an entirely responsible stance on corporate reform. The wider considerations were important in deciding both to offer a DPA to the company and in approving the agreement reached.

Thirdly, there is a close connection between the interests of justice test and the question of whether the terms of the proposed DPA are fair, reasonable and proportionate. So, the terms of the DPA with XYZ made an allowance for its ability to pay, something that was not in doubt in Standard Bank’s case. XYZ was in a very different position, however: it could not pay more than £352,000 without becoming insolvent. It could not therefore pay the financial penalty which ordinarily would have been imposed for offending of this kind. In the event, its parent company agreed, in essence, to pay back to XYZ £6.2 million which, in turn, it could pay towards disgorgement of profits from the corrupt conduct. You will note that when added to the £352,000 fine, the company’s payments under the DPA amount to handing over all the profits it made from the corrupt contracts it won. That this was significantly less than the sum it would have paid had it not been in financial difficulties was the result both of the acceptance that co-operation of the kind it had shown should be rewarded and incentivised and the acceptance also that the interests of justice test meant taking into account the impact the company’s insolvency would have on its innocent staff, service users, customers and the local economy. And, of course, this outcome was fact-specific. Neither we nor the judge would have countenanced such an arrangement had there been the slightest suggestion that the parent company knew of or connived in XYZ’s corrupt business practices or that it was using its subsidiary as a vehicle through which corrupt payments could be made, with a view to cutting it loose if the criminality were ever discovered.

The last twenty years have seen a huge shift in attitudes towards bribery, including not least commercial bribery. States have identified it as a particularly serious form of crime, have agreed to co-operate with each other in the fight against it and have, like the UK, passed or updated their laws against it. Nowadays, one rarely hears in the UK the argument that corruption is an acceptable price of winning business in some parts of the world, and no doubt the same is true in Germany. One place you will never hear such arguments is in an English and Welsh criminal court: our Court of Appeal has said in terms that it is no mitigation to say others do it or it is a way of doing business. Indeed, time and again our judges have emphasised the seriousness of corruption and have sentenced accordingly. Nothing said in approving the two deferred prosecution agreements can be seen as detracting from that.

Instead, the courts have recognised that deferred prosecution agreements are a pragmatic response by our Parliament to serious corporate crime – including both bribery and a failure to prevent bribery. As the judge put it in XYZ,

“… it is important to send a clear message, reflecting a policy choice in bringing DPAs into the law of England and Wales, that a company’s shareholders, customers and employees (as well as those with whom it deals) are far better served by self-reporting and putting in place effective compliance structures. When it does so, that openness must be rewarded and be seen to be worthwhile.”

The reward for XYZ was that it remained in existence, as the fine that would have been imposed on it had it been convicted was well beyond its means. For Standard Bank, it avoided a conviction and protected its reputation as much as possible; significant matters in the winning of future business. And although the point was moot in the XYZ case because of the company’s overall financial position, the judge was willing to countenance a reduction in financial penalty of 50%, instead of the one third discount given to incentivise an early guilty plea, in order to encourage others to conduct themselves as XYZ had when confronting criminality.

These rewards do not come for free. Rather, as the judge noted, they are won through a combination of co-operation and reform. Let me dwell on co-operation, my fourth point. In XYZ’s case, the judge placed particular importance on the promptness of the self-report, the fully disclosed internal investigation and the company’s continuing co-operation. In Standard Bank, the judge gave considerable weight to the company’s immediate self-report and its genuinely pro-active approach in its dealings with us. The company gave us information we might otherwise not have received. The information it gave us from the internal investigation we had sanctioned was full and complete. It provided us with a summary of the first accounts of interviewees, facilitated our access to current employees and provided timely and complete responses to requests for information and material. As the judge put it, “… this self-reporting and co-operation militates very much in favour of finding that a DPA is likely to be in the interests of justice.”  

Co-operation does not cease on entering into a DPA. In both cases, the companies concerned are bound to continue their co-operation during the lifetime of the agreements. In Standard Bank’s case, the obligation includes co-operation both with us and overseas law enforcement, including a commitment to supply all non-privileged material and information relating to the events under investigation in this case. In specifically approving this term of the DPA the judge pointed out that it was obviously in the public interest that individuals involved in the conduct at issue are investigated and prosecuted. I have already noted that the company gave us summaries of witness first accounts.  

Finally, deferred prosecution agreements are not automatic. If a company is not co-operative, we will not offer it the opportunity to enter into a DPA. So, three weeks after the Standard Bank case we secured the conviction of Cyril Sweett plc for an offence of failing to prevent bribery. We did not consider that company to have co-operated with us and saw no reason to offer it a DPA. I would remind you all that if you ever find yourselves in a case involving the Serious Fraud Office, the choice whether or not to co-operate is entirely yours. You should exercise that choice clear in the understanding that if you choose not to co-operate, you will not be offered the opportunity to receive a DPA.