1. 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 into
the Law of England and Wales, the concept of a Deferred Prosecution Agreement (hereafter referred
to as a "DPA") as a means of enabling a corporate body to make full reparation for criminal behaviour
without the collateral damage of a conviction. Reputational and financial damage through criminal
prosecution has the potential to risk jobs and the economic stability of the company itself, thus
impacting 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 the
United States. However, as noted by the Solicitor General at the time that the 2013 Act was
introduced (Edward Garnier QC), DPAs in the US system "are concluded and promulgated
with little, if any, judicial oversight" (Deferred Prosecution Agreements -Sir Edward Garnier
QC, MP, New Zealand Journal, December 2012). An essential ingredient of DPAs as
introduced by the Crime and Courts Act 2013 is therefore, the involvement of the courts at
each 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 prosecutor
and a person ("P") such that in exchange for P's compliance with various strict
requirements, the prosecutor will suspend, and may eventually discontinue, the criminal
prosecution of P (CCA 2013 Sch.17 para.1).
4.
P may only be a body corporate, a partnership or an unincorporated partnership. DPAs are
not available to individuals (Sch.17 para.4(1)). At time of writing, a designated prosecutor
may only be the Director of the Serious Fraud Office ("SFO") or the Director of Public
Prosecutions ("DPP") (Sch.17 para.3(1)(a)-(b)). CCA Sch.17 para.3(1)(c) allows for other
prosecutors 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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2. for prosecutors giving guidance on the general principles to be applied in determining
whether a DPA is likely to be appropriate in a given case. A prosecutor must take account
of the Code in exercising functions under Sch.17.
6.
The criminal prosecution subject to suspension under the DPA procedure must be for a
specified offence listed in Pt 2 to Sch.17. Included within these offences are the common
law offences of conspiracy to defraud and cheating the public revenue and a variety of
statutory offences for economic crimes (e.g. under the Bribery Act 2010, the Companies Act
2006, 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 Code
Test. The evidential stage must either be met or the prosecutor must have a reasonable
suspicion that P committed the offence and reasonable grounds for believing that further
investigation 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 by
entering into a DPA with P, rather than bringing a criminal prosecution (Joint Code of
Practice on DPAs, para.1.2(ii)).
8.
A fundamental feature of DPAs is that they are not available as of right to commercial
organisations facing prosecution for a specified offence - an invitation to negotiate a DPA is
a 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 the
paramount 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, the
relationship 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 compliance
programme since the offence was committed;
e.
Failure to notify the wrongdoing within reasonable time of the offending conduct coming
to 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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3. 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 from
that 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 and
shareholders 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 was
introduced for the DPA process. This, and the Joint Code on DPAs, contains much of the
mandated procedure for DPAs.
12.
The negotiation phase begins with a formal letter of invitation to P setting out the basis for
the negotiations (Joint Code of Practice on DPAs, para.3.5). If P chooses to engage in the
negotiations, then the prosecutor will send a second letter outlining the process and setting
out various undertakings (for example, in relation to confidentiality) (Joint Code of Practice
on 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 it
would "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, the
prosecutor must apply to the Crown Court for a declaration that entering into a DPA with P
is 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 reasons
for its decision on whether or not to make a declaration (Sch.17 para.7(2)). Both the
Preliminary Hearing and declaration will be private (Sch.17 para.7(4)). If a declaration is
made, negotiations will continue to finalise the terms of the DPA. There will then be a Final
Hearing where a declaration may be made that the DPA in its final form is in the interests of
justice and that its terms are fair, just and proportionate (Sch.17 para.8). If a declaration is
not made, the prosecutor may make a further application to the court.
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4. 14.
What is clear from the second DPA (against XYZ Limited) is that although the final hearing
will be published and the making of the DPA will be announced, the court is alive to the
concerns of potential prejudice to on-going criminal prosecutions against individuals. In that
case, the judgment was published in a redacted form pending the outcome of concurrent
criminal proceedings against former employees of the company.
15.
Content of DPA: The DPA "must contain a statement of facts relating to the alleged
offence, which may include admissions made by P" (Sch.17 para.5(1)). It must also include
the requirements with which P must comply, and may stipulate what consequences will
follow 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, the
following 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 compliance
programme 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 the
DPA.
"
17.
Schedule 17 para.5(4) states that the amount of any financial penalty imposed under the
DPA must be "broadly comparable" to the fine that the court would have imposed following
a guilty plea to the alleged offence.
18.
A new Definitive Guideline for Corporate Offenders on Fraud, Bribery and Money
Laundering was introduced by the Sentencing Council on 31 January 2014. This will assist
in the provision of a transparent and consistent approach to the setting of a financial penalty
as required by the Joint Code of Practice.
19.
The DPA must also contain an expiry date upon which the prosecutor will give notice that it
does not wish the proceedings to continue (Sch.17 para.5(2)). No fresh proceedings may be
instituted against the company for the offence unless it is revealed that P provided
inaccurate, misleading or incomplete information to the prosecutor; and P knew or ought to
have known that the information was inaccurate, misleading, or incomplete (Sch.17
para.11(3)).
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5. 20.
Variation/Failure to comply: Should the parties seek variation of the terms of the DPA
then an application must be made to the Court for a further declaration that the proposed
terms (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 may
make an application to the Crown Court under Sch.17 para.9. The Court must then
determine, on the balance of probabilities, whether such a breach occurred (Sch.17
para.9(2)). If P is found to be in breach the Court may either terminate the DPA or it may
invite both parties to negotiate terms to remedy the situation (Sch.17 para.9(3)). If the
prosecutor does not pursue such an application, it must still publish the reasons for its belief
that the terms of the DPA have not been complied with and the reasons for the decision not
to 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, Sir
Brian Leveson, approved the first application for a DPA, in this case between the SFO and
Standard Bank Plc before a hearing at Southwark Crown Court sitting at the Royal Courts of
Justice. In line with DPA procedure, an Indictment alleging an offence of failing to prevent
bribery contrary to s.7 of the a Bribery Act 2010 was immediately suspended. The
underlying offence related to a US$6 million payment by its sister bank, Stanbic Bank, in
March 2013 to a local partner in Tanzania, which the SFO claimed was intended to induce
members 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 USD
25.2 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 of
conducting the investigation and DPA in the amount of £330,000 (SFO Press Release
dated 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 and
corruption offences alleged to have been committed between 2004 and 2012, by a
company referred to as XYZ Limited, in relation to securing contracts in overseas
jurisdictions (Serious Fraud Office v XYZ Limited (final redacted) dated 11 July 2016). The
company's identity remains anonymous due to on-going related litigation concerning former
XYZ employees.
25.
Under the terms of the DPA, XYZ agreed to pay financial orders of £6.5 million; £6.2 million
in 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 been
received in dividends from XYZ from the tainted contracts (SFO Press Release dated 8 July
2016, SFO secures second DPA). ABC also offered to provide financial support to satisfy
the terms of the DPA. Sir Brian Leveson stressed that there is no legal obligation on an
innocent parent company to contribute towards a financial penalty imposed upon its
subsidiary for that subsidiary's criminal conduct.
26.
Co-operation: The facts of both "Standard Bank" and "XYZ" were very different - but the
common refrain in both was that co-operation is key to the conclusion of a DPA.
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6. 27.
Standard Bank was a well-resourced financial institution with equity of US$1.25 billion and
total income of US $133.1 million. By contrast, XYZ was a UK SME whose agreed
unencumbered balance of available cash was £352,000, and which was supported in part
through the DPA by its parent company, ABC.
28.
The bribery in Standard Bank was relatively limited and discrete: its wrongdoing was
restricted to the maintenance of inadequate compliance systems to prevent associated
persons 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 extensive
and repeated. During a period of eight years from 2004 to 2012, XYZ, through a small but
important group of its employees and agents, was involved in the systematic offer and/or
payment of bribes to secure 28 contracts in foreign jurisdictions. Intermediary agents in a
particular jurisdiction would offer or place bribes with those thought to exert influence or
control over the awarding of contracts. A total of £17.24m was paid to XYZ on the 28
contracts on which bribes were offered. This sum represented 15.81% of the total turnover
of XYZ in the relevant period. The total gross profit from the contracts amounted to £6.5m
out 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 could
approve DPAs because of the extent of co-operation in each case. In both cases, the Court
underlined the following factors as militating in favour of the DPA: the promptness of the
self-report; the genuinely proactive approach to the wrongdoing that the companies
uncovered; the fact that, but for the self-report, the offending might otherwise have
remained unknown to the prosecutor; the fact that much of the information relied upon by
the SFO was evidence voluntarily disclosed by the companies; the fact that both companies
also identified relevant witnesses, disclosing their accounts and the documents shown to
them.
30.
Whilst neither the DPA Code nor either of the judgments thus far go as far as to make
co-operation an essential pre-condition of a DPA, the lesson of Standard Bank and XYZ is
that 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 a
company has not co-operated; that is to say, where a company does not bring relevant
conduct to the prosecutor's attention; does not share with it the fruits of its own enquiries
and 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 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 all 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".
32.
Credit and the need to "step-back" have been flexibly applied so as to incentivise
self-reporting: Critics of the DPA legislation and Code complained that it failed to offer
sufficient incentive to self-report on the basis that any financial penalty, so it was
understood, had to be broadly comparable to the penalty that would have been given had
the company been prosecuted and pleaded guilty. The lesson from Standard Bank and XYZ
is that in the appropriate case, the court will apply the guidance on credit and "stepping
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7. 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 fee
which Standard Bank and its sister company received as joint lead managers for the
transaction (1.4% of the US $600 million capital raised, or US $8.4m). In addition, a
financial penalty was agreed in the sum of US $16.8m. In calculating this sum, regard had
to be paid to the Sentencing Council Guideline on bribery. The figure was calculated by
taking a "harm" figure equal to the gross profit from the contract obtained - in this case the
US $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 in
the Guideline). That led to a figure of US $25.3m. The court was then obliged, following
Step 5 of the Guideline, to "step back" and consider the overall effect of its orders such that
the combination achieves "removal of all gain, appropriate additional punishment and
deterrence". The court considered that the "stepping back" process in Standard Bank
underlined that the approach of 300% of the value of the transaction represented a
reasonable penalty. It then moved to Step 7 of the Guideline and approved the reduction of
the 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 28
implicated contracts of some £6,553,085. However, XYZ had limited means and ability to
pay, such that the maximum amount it would be able to provide towards paying any
financial obligation imposed without becoming insolvent was estimated to be £352,000. On
the other hand, its parent company, ABC, had received £6m in dividends from XYZ since
acquiring it in February 2000. The court was keen to emphasise that not only was ABC
entirely ignorant of the activities of its subsidiary but that its conduct once it became aware
of the facts was beyond reproach. ABC accepted nontheless, that an appropriate proportion
should properly be reflected in the terms of any DPA, notwithstanding that it was under no
legal obligation to support its subsidiary in this way. ABC was prepared to offer a long-term
loan to XYZ so that the latter was able to pay some £6,201,085 of the £6.5m towards
disgorgement 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 academic
because, given the amount disgorged, whatever multiplier was chosen and however
substantial 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 to
reflect the full admissions (Step 7), the court interpreted the provisions flexibly, indicating
that it was in the interests of justice to apply the relevant discounts (Step 7) before "stepping
back" (Step 5). The court then took the entirely novel step of applying a 50% discount (to
reach £8.2m) to reflect the fact that the admissions were far in advance of the first
reasonable opportunity and "to encourage others how to conduct themselves when
confronting criminality as XYZ has". It then "stepped back" and took into account all the
financial circumstances, including the fact that only £352,000 was available to XYZ to
provide 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 starting
point had been £8.2m) as leading to a total which equated to the gross profit on the
implicated contracts.
36.
The message is that in the appropriate case the parties to a DPA can expect the Guidelines
to 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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8. was exemplary, the circumstances would be very different were a parent company also to
be guilty of misconduct. The judgment concludes with a warning in the following terms: "any
evidence that a parent company has set up a subsidiary as a vehicle through which corrupt
payment may be made so that the company can be abandoned in the event that the
payment comes to light is likely to lead to prosecution of the parent company under section
7(1) of the Bribery Act 2010 …. A pre-existing plan to behave corruptly through the
subsidiary would obviously be treated as a seriously aggravating factor".
38.
Privilege: In the Standard Bank case, an integral feature was the company's cooperation
with 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 quickly
provided 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 the
preliminary judgment, suggests that an organisation seeking to enter into a DPA should give
serious consideration to voluntarily waiving any claim to legal advice privilege, including its
investigation 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, the
decision to waive privilege is a complex one, and companies should also consider the
inherent uncertainty as to the outcome of DPA negotiations and the court's decision as
regards whether a DPA is in the public interest.
39.
By contrast, in the XYZ Limited case, XYZ did not waive privilege (Serious Fraud Office v
XYZ Limited (preliminary redacted) dated 8 July 2016 at 27 and 62). It is clear therefore that
provided there remains effective cooperation with the SFO, a waiver of privilege may not
necessarily 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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9. 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's
Rep. 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 Public
Prosecutions Sentencing Guidelines
Sentencing Council's definitive guideline for corporate offenders on fraud, bribery and money
laundering, 31 January 2014
SFO Guidance entitled Bribery Act: Guidance on adequate procedures facilitation payments and
business 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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