Louise Hodges and Jonathan Grimes of Kingsley Napley take an in-depth look at the trends in corporate criminal liability in the UK, notably the creation of deferred prosecution arrangements:
“In reality many of the corporate fraud investigations are cross-border and may involve prosecutors from a number of jurisdictions. It is very possible therefore that the UK DPA may come into its own as a way of contributing to a global settlement agreement.”
“Officials across government are looking very closely at corporate criminal liability, and in particular an offence of failure to prevent financial crime, and I find this an attractive option.”
These were the words of Solicitor General Oliver Heald QC, quoted in London’s Evening Standard newspaper on 30 June 2014. Although a few weeks later he was removed from his post in a cabinet reshuffle, that is unlikely to be the end of the UK government actively looking at ways in which the law could be changed to make it easier to prosecute companies for financial crime. This has been a long-running debate with a concern that there have been only a very few successful prosecutions of corporate entities in this area. The reason given is that (apart from specific statutory offences that can be committed by a company) currently, for any offence in the UK that involves a mental element (including offences such as fraud), the “identification principle” applies. This establishes that only the acts and state of mind of those who represent the “directing mind and will of the company” can be said to represent the company itself. Under the identification principle, it is only the most senior personnel in a company (generally understood to be those at the main board level or equivalent) who fall within this category. Attempts have already been made to redress this situation, with the introduction of new statutory corporate criminal offences, most notably in section 7 of the Bribery Act 2010 (ie, failing to prevent bribery) and the Corporate Manslaughter and Corporate Homicide Act 2007, together with new investigative tools such as the introduction of deferred prosecution agreements (DPAs) into UK law on the 24 February 2014 by the Crime and Courts Act. Future developments in this area are likely to include attempts to amend the law of corporate criminal liability.
Anticipated developments in corporate criminal liability
David Green, the current Director of the Serious Fraud Office (SFO), reopened the debate to extend the “failing to prevent” offence found in the Bribery Act to other offences back in 2013. He suggested a company that failed to prevent other economic crimes such as fraud or dishonesty committed by its employees or agents would be guilty of an offence. As with the Bribery Act offence, he proposes an “adequate procedures” defence to be provided within the statute.
Alternative proposals have also been made in recent months. The Labour Party has suggested that the directing mind doctrine should be adapted to be more in line with the US model of “respondeat superieur” (“let the master answer”). This provides that a corporation may be held criminally liable for the illegal acts of its directors, officers, employees and agents if it is established that the corporate agent’s actions were within the scope of his or her duties and intended, at least in part, to benefit the corporation.
With a general election to be held in 2015, it is unlikely that new legislation will be introduced before then; however, with the two main political parties vying for position and seeing political mileage in presenting a strong stance against corporate criminal activity, it is likely that changes may come shortly after.
Deferred prosecution agreements
In February this year, DPAs became available in the UK. The basic principle is that through a process of negotiation, a prosecutor and a potential corporate criminal suspect can enter into an agreement whereby the prosecutor agrees not to prosecute the company in return for certain conditions being met, typically the payment of a large financial penalty and the agreement to take certain steps to ensure there is no repeat of the offending behaviour. Although there are similarities to the system in the US, there are distinct differences as well, in particular that the process is not available to individuals but only to corporates.
The SFO is the agency most likely to use the DPA process and it had been anticipated that the first DPA would have been concluded very shortly after the legislation was introduced; however, at the time of writing, none have been announced. Therefore, while DPAs will no doubt be a welcome additional tool in the prosecutor’s armoury, the extent to which they will be a fair and effective measure for corporates is as yet unclear.
The advantages of DPAs are presented as, among others: certainty of outcome; the avoidance of a corporate conviction (which might well lead to exclusion from certain public contracts); and the savings of cost and time. The attraction of such a system may therefore appear obvious in circumstances where a company finds itself clearly exposed to the risk of a corporate prosecution. However, early assessments of the system suggest that it may lack sufficient certainty, incentive or reward to encourage good corporate citizens to self-report promptly and in the manner that the authorities envisage.
The prospect of the potential to negotiate a DPA means difficult decisions need to be made by a corporate suspect at a very early stage – in particular whether or not to self-report and, if so, when. The existence of a “genuine” self-report has been identified by the current director of the SFO as a significant factor in determining whether to invite an organisation to enter into a DPA. This may require some disclosure of privileged material, such as some of the material produced in the course of an internal investigation, including early interviews of witnesses. The decisions of whether and what to disclose must be made before there is any certainty that the prosecutor will consider the case suitable for a DPA.
Once a self-report has been made, there is no guarantee that a DPA will be offered – the decision of whether or not to invite a suspect to seek to negotiate a DPA is a matter solely for the prosecutor’s discretion. The DPA Codes of Practice set out various factors for and against the issue of such an invitation; however, there is no right for a corporate to insist that they are considered or invited to enter into the process. Therefore there is no certainty that by self-reporting the company may even get on to the first rung of the DPA process.
If the prosecutor decides to issue an invitation then a process of negotiation follows. Assuming that is successful then the conclusion to the agreement involves a two-stage court process. In the first stage, a hearing before a judge takes place in private at which the terms of the agreement are set out, in order that the court can be satisfied that the agreement is fair, reasonable and proportionate. If this application for approval is successful, then a second hearing takes place in open court at which the approval of the DPA is declared by the court, along with the reasons and an agreed statement of facts giving full particulars relating to each alleged offence. This judicial supervision should in principle have many benefits to the fairness of the process; however it adds a further element of uncertainty as there is no guarantee that the position that has been agreed through months of negotiation will be sanctioned by the court.
Any financial penalty is to be broadly comparable to the level of a fine the court would have imposed following a guilty plea. The lengthy and costly investigations that had been entered into in order to make a self-report, and any ongoing investigations that the authorities have required the company to conduct in order to demonstrate their full cooperation, are unlikely to be recognised in any fine.
A DPA will last for a specified term. Assuming compliance with all of the conditions within the agreement, at the conclusion of that term, the company will be free from prosecution. Failure to comply with the conditions of the agreement may result in the matter returning to court, and could ultimately result in the prosecution of the company for the original offence under investigation.
In a recent speech at the UK Aerospace and Defence Industry seminar, Ben Morgan, joint head of Bribery and Corruption at the SFO, noted that if he was back in his old job representing a corporate that had become aware of a potential criminal incident, he would ask himself two questions: will the SFO ever find out? And if they do, what would they really do about it anyway? He used those questions to highlight the SFO’s heavy investment in its intelligence capability and plans to use the full range of investigative tools available to it, not just in recovering historical evidence but also to gather real time evidence. He also reminded those present that the SFO is “ultimately a prosecutor and you can expect the bulk of our caseload to be prosecuted in the usual way”. Yet, a real issue both for the adviser and the SFO arises from the fact that, in contrast to the US, achieving the conviction of a corporate suspect in the UK remains extremely difficult in respect of many of the offences to which DPAs will apply. This means that entering into DPA negotiations in the UK is a far from obvious decision, since the prospects of a successful prosecution in the alternative remains low.
In reality many of the corporate fraud investigations are cross border and may involve prosecutors from a number of jurisdictions. It is very possible therefore that the UK DPA may come into its own as a way of contributing to a global settlement agreement.
The position of directors and senior managers
A significant difference of the DPA regime in the UK compared to the US is that it only applies to companies, not to individuals. This distinction may increase the risk to certain individuals, particularly those at a more senior level. The regime is designed to encourage companies to cooperate and provide material that will assist the prosecution of individuals. This brings in to sharp focus issues relating to the manner in which any investigation is conducted, in particular the terms of reference, scope, disclosure and conduct of any interviews.
There are a large number of statutes in English law which include a provision whereby, if the company commits an offence, and it can be established that this offence was committed with the consent, connivance or through the neglect of an individual (generally a director, company officer or senior manager), then that individual is also guilty of the offence of the company.
While the concepts of consent and connivance both require actual knowledge of the unlawful behaviour of the company, the concept of personal criminal liability resulting from a person’s neglect is more problematic. No direct knowledge of the company’s offence is required. The existence of personal criminal liability in circumstances of alleged neglect will turn on the specific facts of the case, including how remote from the offending activity of the company the particular individual was.
It is a cause for concern that a company seeking a pragmatic solution to a potentially lengthy and expensive criminal investigation may be encouraged to admit “guilt” in order to achieve a DPA where there is no clear evidence that an offence has actually taken place. This could, in turn, expose senior officers and employees to the risk of personal criminal liability on the basis that their alleged neglect contributed to the admitted ‘offending’ of the company.
To date there has been no concluded DPA, although there is believed to be at least one that is currently at the point of negotiation. It remains very uncertain to what extent DPAs will become part of the mainstream within UK criminal law; however, it may take some other significant changes in corporate crime to make DPAs a more viable prospect in the UK.