Deferred prosecution agreements: bribery

Latest Update

19 October 2016

Author(s)

Paul Raudnitz - QEB Hollis Whiteman Chambers

Section 45 and Sch.17 of the Crime and Courts Act 2013 (CCA 2013) introduced for the first time intothe Law of England and Wales, the concept of a Deferred Prosecution Agreement (hereafter referredto as a "DPA") as a means of enabling a corporate body to make full reparation for criminal behaviourwithout the collateral damage of a conviction. Reputational and financial damage through criminalprosecution has the potential to risk jobs and the economic stability of the company itself, thusimpacting employees and shareholders who may have been in no way involved in the corruption (SFO Guidance on Deferred Prosecution Agreements).

Overview of Topic

1.DPAs in the law of England and Wales have been broadly modelled on the system in theUnited States. However, as noted by the Solicitor General at the time that the 2013 Act wasintroduced (Edward Garnier QC), DPAs in the US system "are concluded and promulgatedwith little, if any, judicial oversight" (Deferred Prosecution Agreements -Sir Edward GarnierQC, MP, New Zealand Journal, December 2012). An essential ingredient of DPAs asintroduced by the Crime and Courts Act 2013 is therefore, the involvement of the courts ateach stage of the process.

2.To date there have been two DPAs successfully concluded in England and Wales:"Standard Bank" and "XYZ Ltd".

3.The DPA in overview: A DPA is a voluntary agreement between a designated prosecutorand a person ("P") such that in exchange for P's compliance with various strictrequirements, the prosecutor will suspend, and may eventually discontinue, the criminalprosecution of P (CCA 2013 Sch.17 para.1).

4.P may only be a body corporate, a partnership or an unincorporated partnership. DPAs arenot available to individuals (Sch.17 para.4(1)). At time of writing, a designated prosecutormay only be the Director of the Serious Fraud Office ("SFO") or the Director of PublicProsecutions ("DPP") (Sch.17 para.3(1)(a)-(b)). CCA Sch.17 para.3(1)(c) allows for otherprosecutors also to be "designated" by an order made by the Secretary of State.

5.Schedule 17 para.6(1) requires the Director of the SFO and the DPP to issue a joint Code

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for prosecutors giving guidance on the general principles to be applied in determiningwhether a DPA is likely to be appropriate in a given case. A prosecutor must take accountof the Code in exercising functions under Sch.17.

6.The criminal prosecution subject to suspension under the DPA procedure must be for aspecified offence listed in Pt 2 to Sch.17. Included within these offences are the commonlaw offences of conspiracy to defraud and cheating the public revenue and a variety ofstatutory offences for economic crimes (e.g. under the Bribery Act 2010, the Companies Act2006, the Fraud Act 2006 and the Proceeds of Crime Act 2002).

7.In deciding whether to consider a DPA, the prosecutor must first consider the Full CodeTest. The evidential stage must either be met or the prosecutor must have a reasonablesuspicion that P committed the offence and reasonable grounds for believing that furtherinvestigation would result in the evidential stage being met (Joint Code of Practice on DPAs,para.1.2(i)). The public interest stage will require that the public interest be best served byentering into a DPA with P, rather than bringing a criminal prosecution (Joint Code ofPractice on DPAs, para.1.2(ii)).

8.A fundamental feature of DPAs is that they are not available as of right to commercialorganisations facing prosecution for a specified offence - an invitation to negotiate a DPA isa matter for the prosecutor's discretion (Joint Code of Practice on DPAs, para.2.1). In fact,the SFO's first two successful DPA agreements (considered below) have revealed theparamount importance of full cooperation with the SFO throughout the investigative process(by contrast, in what was the first SFO prosecution under s.7of the Bribery Act 2010, therelationship between Sweett Group Plc and the SFO was fraught with difficulties).

9.Factors in favour of prosecution (and therefore against a DPA) may include:

a.The seriousness of the offence;

b.A history of similar conduct;

c.The conduct alleged is part of the established business practices of P;

d.P has not been able to demonstrate a significant improvement in its complianceprogramme since the offence was committed;

e.Failure to notify the wrongdoing within reasonable time of the offending conduct comingto light (Joint Code of Practice on DPAs, paras 2.4 - 2.8.1) .

10.Factors militating against prosecution (and therefore in favour of a DPA) include:

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a.Co-operation;

b.A lack of history of similar conduct;

c.The existence of a proactive corporate compliance programme;

d.The offending represents isolated actions by individuals;

e.The offending is not recent and P in its current form is effectively a different entity fromthat which committed the offences;

f.A conviction is likely to have disproportionate consequences for P;

g.A conviction is likely to have collateral effects on the public, P's employees andshareholders or P's institutional pension holders (Joint Code of Practice on DPAs, paras.2.4 - 2.8.1).

11.Procedure for a DPA: A new Pt 11 to the Criminal Procedure Rules 2015/1490 wasintroduced for the DPA process. This, and the Joint Code on DPAs, contains much of themandated procedure for DPAs.

12.The negotiation phase begins with a formal letter of invitation to P setting out the basis forthe negotiations (Joint Code of Practice on DPAs, para.3.5). If P chooses to engage in thenegotiations, then the prosecutor will send a second letter outlining the process and settingout various undertakings (for example, in relation to confidentiality) (Joint Code of Practiceon DPAs, para.3.6). Either party can withdraw from the negotiating process at any stage.Should it be the prosecutor who withdraws, then the Joint Code of Practice suggests that itwould "ordinarily be appropriate" to provide P with the "gist" of the reasons for so doing (Joint Code of Practice on DPAs, para.3.2).

13.Whilst negotiations are on-going, but prior to the terms of the DPA being finalised, theprosecutor must apply to the Crown Court for a declaration that entering into a DPA with Pis likely to be in the interests of justice, and the proposed terms of the DPA are fair,reasonable and proportionate (CCA 2013 Sch.17 para.7(1)). The court must give reasonsfor its decision on whether or not to make a declaration (Sch.17 para.7(2)). Both thePreliminary Hearing and declaration will be private (Sch.17 para.7(4)). If a declaration ismade, negotiations will continue to finalise the terms of the DPA. There will then be a FinalHearing where a declaration may be made that the DPA in its final form is in the interests ofjustice and that its terms are fair, just and proportionate (Sch.17 para.8). If a declaration isnot made, the prosecutor may make a further application to the court.

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14.What is clear from the second DPA (against XYZ Limited) is that although the final hearingwill be published and the making of the DPA will be announced, the court is alive to theconcerns of potential prejudice to on-going criminal prosecutions against individuals. In thatcase, the judgment was published in a redacted form pending the outcome of concurrentcriminal proceedings against former employees of the company.

15.Content of DPA: The DPA "must contain a statement of facts relating to the allegedoffence, which may include admissions made by P" (Sch.17 para.5(1)). It must also includethe requirements with which P must comply, and may stipulate what consequences willfollow from non-compliance.

16.Schedule 17 para.5(3) states that:

"the requirements that a DPA may impose on P include, but are not limited to, thefollowing requirements-

(a) to pay to the prosecutor a financial penalty;

(b) to compensate victims of the alleged offence;

(c) to donate money to a charity or other third party;

(d) to disgorge any profits made by P from the alleged offence;

(e) to implement a compliance programme or make changes to an existing complianceprogramme relating to P's policies or to the training of P's employees or both;

(f) to co-operate in any investigation related to the alleged offence;

(g) to pay any reasonable costs of the prosecutor in relation to the alleged offence or theDPA.

"

17.Schedule 17 para.5(4) states that the amount of any financial penalty imposed under theDPA must be "broadly comparable" to the fine that the court would have imposed followinga guilty plea to the alleged offence.

18.A new Definitive Guideline for Corporate Offenders on Fraud, Bribery and MoneyLaundering was introduced by the Sentencing Council on 31 January 2014. This will assistin the provision of a transparent and consistent approach to the setting of a financial penaltyas required by the Joint Code of Practice.

19.The DPA must also contain an expiry date upon which the prosecutor will give notice that itdoes not wish the proceedings to continue (Sch.17 para.5(2)). No fresh proceedings may beinstituted against the company for the offence unless it is revealed that P providedinaccurate, misleading or incomplete information to the prosecutor; and P knew or ought tohave known that the information was inaccurate, misleading, or incomplete (Sch.17para.11(3)).

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20.Variation/Failure to comply: Should the parties seek variation of the terms of the DPAthen an application must be made to the Court for a further declaration that the proposedterms (as amended) are in the interests of justice and are fair, reasonable and proportionate(Sch.17 para.10(2)).

21.If the prosecutor believes that P has failed to comply with the terms of the DPA, he maymake an application to the Crown Court under Sch.17 para.9. The Court must thendetermine, on the balance of probabilities, whether such a breach occurred (Sch.17para.9(2)). If P is found to be in breach the Court may either terminate the DPA or it mayinvite both parties to negotiate terms to remedy the situation (Sch.17 para.9(3)). If theprosecutor does not pursue such an application, it must still publish the reasons for its beliefthat the terms of the DPA have not been complied with and the reasons for the decision notto make an application to the court (Sch.17 para.9(8)).

22.Standard Bank: On 30 November 2015, the President of the Queen's Bench Division, SirBrian Leveson, approved the first application for a DPA, in this case between the SFO andStandard Bank Plc before a hearing at Southwark Crown Court sitting at the Royal Courts ofJustice. In line with DPA procedure, an Indictment alleging an offence of failing to preventbribery contrary to s.7 of the a Bribery Act 2010 was immediately suspended. Theunderlying offence related to a US$6 million payment by its sister bank, Stanbic Bank, inMarch 2013 to a local partner in Tanzania, which the SFO claimed was intended to inducemembers of the Government of Tanzania, to show favour to a private placement proposal.

23.As part of the DPA, Standard Bank agreed to pay financial penalties amounting to USD25.2 million, USD 7 million to the Government of Tanzania by way of compensation(Serious Fraud Office v Standard Bank Plc (now Serious Fraud Office v Standard Bank Plc(now ICBC Standard Bank Plc) (Final) [2016] Lloyd's Rep. F.C. 102) and the SFO's costs ofconducting the investigation and DPA in the amount of £330,000 (SFO Press Releasedated 30 November 2015, SFO agrees first UK DPA with Standard Bank).

24.XYZ Ltd: On 8 July 2016, Sir Brian Leveson approved a DPA concerning bribery andcorruption offences alleged to have been committed between 2004 and 2012, by acompany referred to as XYZ Limited, in relation to securing contracts in overseasjurisdictions (Serious Fraud Office v XYZ Limited (final redacted) dated 11 July 2016). Thecompany's identity remains anonymous due to on-going related litigation concerning formerXYZ employees.

25.Under the terms of the DPA, XYZ agreed to pay financial orders of £6.5 million; £6.2 millionin disgorgement of gross profits and a £352,000 financial penalty. XYZ's parent company,ABC Limited agreed to return £2 million towards the disgorgement; money which had beenreceived in dividends from XYZ from the tainted contracts (SFO Press Release dated 8 July2016, SFO secures second DPA). ABC also offered to provide financial support to satisfythe terms of the DPA. Sir Brian Leveson stressed that there is no legal obligation on aninnocent parent company to contribute towards a financial penalty imposed upon itssubsidiary for that subsidiary's criminal conduct.

26.Co-operation: The facts of both "Standard Bank" and "XYZ" were very different - but thecommon refrain in both was that co-operation is key to the conclusion of a DPA.

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27.Standard Bank was a well-resourced financial institution with equity of US$1.25 billion andtotal income of US $133.1 million. By contrast, XYZ was a UK SME whose agreedunencumbered balance of available cash was £352,000, and which was supported in partthrough the DPA by its parent company, ABC.

28.The bribery in Standard Bank was relatively limited and discrete: its wrongdoing wasrestricted to the maintenance of inadequate compliance systems to prevent associatedpersons from committing an offence of bribery on a single occasion in a single transaction.The sum paid as a bribe was valued at $6m. By contrast, the bribery in XYZ was extensiveand repeated. During a period of eight years from 2004 to 2012, XYZ, through a small butimportant group of its employees and agents, was involved in the systematic offer and/orpayment of bribes to secure 28 contracts in foreign jurisdictions. Intermediary agents in aparticular jurisdiction would offer or place bribes with those thought to exert influence orcontrol over the awarding of contracts. A total of £17.24m was paid to XYZ on the 28contracts on which bribes were offered. This sum represented 15.81% of the total turnoverof XYZ in the relevant period. The total gross profit from the contracts amounted to £6.5mout of a total gross profit of £31.4m (i.e. 20.82%).

29.These differences notwithstanding, the Court was at pains to emphasise that it couldapprove DPAs because of the extent of co-operation in each case. In both cases, the Courtunderlined the following factors as militating in favour of the DPA: the promptness of theself-report; the genuinely proactive approach to the wrongdoing that the companiesuncovered; the fact that, but for the self-report, the offending might otherwise haveremained unknown to the prosecutor; the fact that much of the information relied upon bythe SFO was evidence voluntarily disclosed by the companies; the fact that both companiesalso identified relevant witnesses, disclosing their accounts and the documents shown tothem.

30.Whilst neither the DPA Code nor either of the judgments thus far go as far as to makeco-operation an essential pre-condition of a DPA, the lesson of Standard Bank and XYZ isthat in practice it is very hard to envisage any case where a prosecutor - let alone a judge -is likely to be persuaded that a DPA is in the interests of justice in circumstances where acompany has not co-operated; that is to say, where a company does not bring relevantconduct to the prosecutor's attention; does not share with it the fruits of its own enquiriesand does not identify or make available relevant witnesses.

31.On the other hand, where such features are present, a DPA may still be countenanced,notwithstanding (as was present in XYZ) very extensive misconduct. As the Court said inXYZ: "it is important to send a clear message , reflecting a policy choice in bringing DPAsinto the law of England and Wales, that a company's shareholders, customers andemployees (as well as all those with whom it deals) are far better served by self-reportingand putting in place effective compliance structures. When it does so, that openness mustbe rewarded and be seen to be worthwhile".

32.Credit and the need to "step-back" have been flexibly applied so as to incentiviseself-reporting: Critics of the DPA legislation and Code complained that it failed to offersufficient incentive to self-report on the basis that any financial penalty, so it wasunderstood, had to be broadly comparable to the penalty that would have been given hadthe company been prosecuted and pleaded guilty. The lesson from Standard Bank and XYZis that in the appropriate case, the court will apply the guidance on credit and "stepping

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back" flexibly so as to provide sufficient incentive to self-report.

33.In Standard Bank, the DPA allowed for the disgorgement of profits in the form of the feewhich Standard Bank and its sister company received as joint lead managers for thetransaction (1.4% of the US $600 million capital raised, or US $8.4m). In addition, afinancial penalty was agreed in the sum of US $16.8m. In calculating this sum, regard hadto be paid to the Sentencing Council Guideline on bribery. The figure was calculated bytaking a "harm" figure equal to the gross profit from the contract obtained - in this case theUS $8.4m. The court considered that it was then appropriate to take a multiplier of 300%(which is the upper end of medium culpability and the starting point of higher culpability inthe Guideline). That led to a figure of US $25.3m. The court was then obliged, followingStep 5 of the Guideline, to "step back" and consider the overall effect of its orders such thatthe combination achieves "removal of all gain, appropriate additional punishment anddeterrence". The court considered that the "stepping back" process in Standard Bankunderlined that the approach of 300% of the value of the transaction represented areasonable penalty. It then moved to Step 7 of the Guideline and approved the reduction ofthe penalty by one third to US $16.8m reflect the self-report and admissions.

34.In XYZ the circumstances were different. XYZ made a total gross profit as a result of the 28implicated contracts of some £6,553,085. However, XYZ had limited means and ability topay, such that the maximum amount it would be able to provide towards paying anyfinancial obligation imposed without becoming insolvent was estimated to be £352,000. Onthe other hand, its parent company, ABC, had received £6m in dividends from XYZ sinceacquiring it in February 2000. The court was keen to emphasise that not only was ABCentirely ignorant of the activities of its subsidiary but that its conduct once it became awareof the facts was beyond reproach. ABC accepted nontheless, that an appropriate proportionshould properly be reflected in the terms of any DPA, notwithstanding that it was under nolegal obligation to support its subsidiary in this way. ABC was prepared to offer a long-termloan to XYZ so that the latter was able to pay some £6,201,085 of the £6.5m towardsdisgorgement of profits.

35.Turning to the financial penalty, the court considered that, even taking a multiplier of 250%,the starting point was just under £16.4m. However, it recognised that this was academicbecause, given the amount disgorged, whatever multiplier was chosen and howeversubstantial the discounts, the result would be a figure which XYZ simply could not pay,resulting in its insolvency. Rather than "stepping back" (Step 5) and then discounting toreflect the full admissions (Step 7), the court interpreted the provisions flexibly, indicatingthat it was in the interests of justice to apply the relevant discounts (Step 7) before "steppingback" (Step 5). The court then took the entirely novel step of applying a 50% discount (toreach £8.2m) to reflect the fact that the admissions were far in advance of the firstreasonable opportunity and "to encourage others how to conduct themselves whenconfronting criminality as XYZ has". It then "stepped back" and took into account all thefinancial circumstances, including the fact that only £352,000 was available to XYZ toprovide towards any financial obligation. Taking into account the sum to be disgorged of£6,201,085 it approved a financial penalty of £352,000 (notwithstanding that its startingpoint had been £8.2m) as leading to a total which equated to the gross profit on theimplicated contracts.

36.The message is that in the appropriate case the parties to a DPA can expect the Guidelinesto be applied with some degree of flexibility.

37.The role of the parent company: The message from XYZ is that, whilst ABC's conduct

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was exemplary, the circumstances would be very different were a parent company also tobe guilty of misconduct. The judgment concludes with a warning in the following terms: "anyevidence that a parent company has set up a subsidiary as a vehicle through which corruptpayment may be made so that the company can be abandoned in the event that thepayment comes to light is likely to lead to prosecution of the parent company under section7(1) of the Bribery Act 2010 …. A pre-existing plan to behave corruptly through thesubsidiary would obviously be treated as a seriously aggravating factor".

38.Privilege: In the Standard Bank case, an integral feature was the company's cooperationwith the SFO investigation. Although Sir Brian Leveson did not specifically refer to"privilege", he found it to be "of particular significance" that Standard Bank Plc. had quicklyprovided the full investigation report to the SFO (Serious Fraud Office v Standard Bank Plc(now Serious Fraud Office v Standard Bank Plc (now ICBC Standard Bank Plc) (Final)[2016] Lloyd's Rep. F.C. 102 at 14). The Joint Code of Practice, specifically quoted in thepreliminary judgment, suggests that an organisation seeking to enter into a DPA should giveserious consideration to voluntarily waiving any claim to legal advice privilege, including itsinvestigation material (Serious Bank Plc (now Serious Fraud Office v Standard Bank Plc(now ICBC Standard Bank Plc) (Preliminary) [2016] Lloyd's Rep. F.C. 91). However, thedecision to waive privilege is a complex one, and companies should also consider theinherent uncertainty as to the outcome of DPA negotiations and the court's decision asregards whether a DPA is in the public interest.

39.By contrast, in the XYZ Limited case, XYZ did not waive privilege (Serious Fraud Office vXYZ Limited (preliminary redacted) dated 8 July 2016 at 27 and 62). It is clear therefore thatprovided there remains effective cooperation with the SFO, a waiver of privilege may notnecessarily be a precondition for a DPA.

.

Key Acts

Crime and Courts Act 2013 s.45 and Sch.17

Key Subordinate Legislation

None.

Key Quasi-legislation

Criminal Procedure Rules 2015/1490 Pt 11

Key European Union Legislation

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None.

Key Cases

Serious Fraud Office v Standard Bank Plc (now ICBC Standard Bank Plc) (Final) [2016] Lloyd's Rep.F.C. 102

Serious Fraud Office v Standard Bank Plc (now ICBC Standard Bank Plc) (Preliminary) [2016] Lloyd'sRep. F.C. 91

Serious Fraud Office v XYZ Limited (preliminary redacted) dated 8 July 2016

Serious Fraud Office v XYZ Limited (final redacted) dated 11 July 2016

R v Sweett Group plc (2016) (unreported)

Key Texts

Joint Code of Practice issued by the Director of the SFO together with the Director of PublicProsecutions Sentencing Guidelines

Sentencing Council's definitive guideline for corporate offenders on fraud, bribery and moneylaundering, 31 January 2014

SFO Guidance entitled Bribery Act: Guidance on adequate procedures facilitation payments andbusiness expenditure

SFO revised policy on self-reporting corruption

Bribery: Law and Practice Monty Raphael QC and contributing authors, OUP March 2016

Analysis

KEY AREAS OF COMPLEXITY OR UNCERTAINTY

None.

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POSSIBLE FUTURE DEVELOPMENTS

None.

HUMAN RIGHTS

None.

EUROPEAN UNION ASPECTS

None.

Further Reading

None.

© 2016 Sweet & Maxwell Ltd

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