Crime, fraud and licensing | 01 October 2010

By now, everyone is familiar with the stories in the press about prosecutors and regulators. On the one hand there are swingeing budgets cuts, stripping them of resources and affecting their capacity to investigate. On the other, record fines are being handed down and they are taking every opportunity to remind us that they are effectively managing these cuts, and are still investigating and prosecuting not only individuals but also companies who break the law.

[Continue Reading]

Crime, Fraud and licensing | 01 September 2010

Our previous article ‘Confiscation: the ultimate penalty?’ showed that the law on confiscation, as set out in the Proceeds of Crime Act (POCA) 2002 can have severe financial consequences for both corporates and individuals.

The case law and practice that have evolved since the introduction of POCA 2002 is complex and constantly evolving to deal with the difficult practical consequences that arise from the application of the law. [Continue Reading]

Crime, Fraud and licensing | 01 July 2010

The existence of a mandatory exclusion from public procurement on a permanent and Europe-wide basis presents a real threat to the Serious Fraud Office (SFO)’s new culture of self-reporting.

Richard Alderman, the current director of the SFO, has made it his mission in recent months to encourage companies to step forward and self-report any discovery of wrongdoing in their ranks. The potential reward for such a self-report is an increased likelihood of the matter being dealt with via civil settlement rather than a criminal prosecution and a reduced financial penalty. [Continue Reading]

Crime, fraud and licensing | 01 June 2010

In February 2010 the Sentencing Guidelines Council (the SGC) issued definitive guidelines to courts on imposing appropriate sentences for corporate manslaughter and health and safety offences causing death. The SGC states that fines imposed on companies found guilty of corporate manslaughter should not fall below £500,000, while fines in respect of health and safety offences that are a significant cause of death should be at least £100,000. Crucially, the SGC declined to provide for a fixed link between the imposed fine and the turnover or profitability of the offending company.

First UK corporate manslaughter trial

The guidelines were issued two weeks before the scheduled start of the UK’s first corporate manslaughter trial. An engineering consultancy firm, Cotswold Geotechnical Holdings, was charged pursuant to the Corporate Manslaughter and Corporate Homicide Act 2007 in relation to the death of an employee who died when a trench collapsed on top of them as they collected soil samples. Company director Peter Eaton has also been charged with the common law offence of gross negligence manslaughter. If found guilty, the maximum sentence that Eaton faces is life imprisonment, while the company may be subject to an unlimited fine. The case has been adjourned and it has been reported that the hearing may not commence until autumn 2010, but commentators will closely watch the eventual trial with interest to see how courts apply the new law and, if relevant, the guidelines laid down by the SGC.

Defining corporate manslaughter

The offence of corporate manslaughter:

  1. can only be committed by organisations, as opposed to individuals;
  2. derives from a breach of a duty of care under the law of negligence;
  3. requires that breach to be a gross breach, such that the relevant conduct falls far below what would be expected of the organisation;
  4. further requires that the way the organisation’s activities are organised by senior management forms a significant element of the breach; and
  5. is committed where the gross breach of duty caused a death.

Health and safety offences causing death

While most other offences covered by the guidelines will concern breaches of s2 and s3 of the Health and Safety at Work etc Act 1974, all relevant offences:

  1. can be committed by both organisations and individuals; and
  2. derive from a breach of the duty to ensure the health and safety of employees and other members of the public (and therefore do not depend on the law of negligence).

Comparison

There is clearly an overlap between corporate manslaughter, and health and safety offences that cause death. However, corporate manslaughter will be committed where there is both a gross breach of a duty of care and failings of senior management in the way that the business is run from a safety perspective. These cases will therefore generally involve systemic failures. Health and safety offences, by contrast, are committed where the accused company cannot show that it was not reasonably practicable to avoid a risk of injury or lack of safety. The failing will therefore be operational as opposed to systemic and may well involve instances of minimal failures to reach the standard of reasonable practicability rather than a ‘gross breach’ of a duty.

Significantly, there is a difference in the operation of the burden of proof in respect of each category of offence. In cases of corporate manslaughter, the prosecution have the burden of establishing all elements of the offence. When dealing with a health and safety offence causing death, the prosecutor need only prove that there has been a failure to ensure safety (which is often established simply by pointing to the fact that a death has occurred). The burden then shifts to the defendant to establish that it was not reasonably practicable to do more than was done to comply with the relevant duty.

Ten steps in assessing appropriate sentence

The guidelines set out ten stages to be applied by courts in deciding the sentence to be imposed on convicted companies:

  1. consider the seriousness of the offence;
  2. identify any particular aggravating or mitigating circumstances;
  3. consider the nature, financial organisation and resources of the defendant;
  4. consider the consequences of a fine;
  5. consider compensation (although this is primarily a matter for the civil courts);
  6. assess the fine in light of the foregoing and all the circumstances of the case;
  7. reduce as appropriate for any plea of guilty;
  8. consider costs;
  9. consider a publicity order; and
  10. consider a remedial order.

Seriousness of offence

Given that death is involved, the offence will be self-evidently ‘serious’. The level of seriousness will be determined by the judge following consideration of such factors as:

  1. the foreseeability of serious injury (the more foreseeable, the more serious the offence will be);
  2. how far short of the applicable standard the organisation fell;
  3. how common such breaches are within the organisation (if the non-compliance was an isolated incident the offence will be less serious, whereas endemic departures from good practice will render the offence more grave); and
  4. the level of culpability among senior management (the higher the responsibility of those culpable, the more serious the offence will be).

Aggravating factors

The SGC sets out a non-exhaustive list of aggravating factors in its guidelines, including:

  1. multiple deaths or an additional very serious personal injury;
  2. failure to act on warnings or advice (in particular, from employee health and safety representatives) or to respond appropriately to ‘near misses’ arising from similar circumstances;
  3. cost-cutting at the expense of safety;
  4. deliberate failures to obtain or comply with relevant licences; and
  5. injury to vulnerable persons (described by the guidelines as ‘those whose personal circumstances make them susceptible to exploitation’).

Mitigating factors

A second, similarly non-exhaustive list is set out in the guidelines in respect of mitigating factors. These include:

  1. prompt acceptance of guilt;
  2. co-operation with the ensuing investigation into the circumstances of the offence, above and beyond what will always be expected;
  3. genuine efforts by the organisation to remedy the defect;
  4. a good health and safety record; and
  5. a responsible attitude to health and safety, demonstrated by the commissioning of expert advice or consultation with affected employees.

It could legitimately be noted that a company convicted of any health and safety offence is already required to make efforts to remedy any defect in its practices, and is obliged by law to take a ‘responsible’ attitude to its duties in this regard. It is therefore suggested that courts will require that company to exceed the requirements of law for its past record and response to the offending incident to be taken into account as a mitigating factor.

Nature, financial organisation and resources of the defendant

The third stage involves an examination of the defendant’s means. Initial proposals suggested that the SGC would seek to link the level of fine imposed with the offending company’s annual turnover. The guidelines reject this proposal on the grounds that it is ‘not appropriate’. In the course of the consultation on the draft guidelines, the chair of the SGC, Lord Chief Justice Judge, said that the fixed link to turnover:

‘Could inadvertently risk an unfair outcome, was particularly difficult to apply to public and third sector bodies, was likely to create a perverse incentive to adjust corporate structure to avoid the proper consequences of offending and so did not provide the most effective way of assessing the level of fines across such a wide range of situations.’

However, the guidelines do state that ‘a wealthy defendant should pay more than a poor one’ and that the fine should ‘inflict painful punishment’. This is subject to the caveat that the fine should be set at a level that the defendant can afford to pay, even if it takes several years.

The obligation to provide the requisite financial information falls on the defendant. The court is permitted to draw the appropriate adverse assumptions as to the organisation’s means if the defendant fails to comply with this obligation. The court should review three years of financial information (including the year of the offence) in assessing the appropriate fine.

Consequences of a fine

A court should take into account the consequences of the imposition of a given fine on the defendant. The relevant factors to consider include:

  1. the effect on the innocent employees of the organisation;
  2. the effect on the provision of public services (so that a public organisation, such as a hospital trust, while obliged to achieve the same standards of behaviour as a commercial operation, may benefit from a different approach to determining the level of fine imposed); and
  3. whether the fine would put the defendant out of business (although it is noted that ‘in some bad cases this may be an acceptable consequence’).

The guidelines also stipulate that certain factors will not normally be relevant, including the effects on shareholders, the effects on directors, the possibility of a company increasing the prices it would normally charge in response to the fine, the liability for civil compensation and the cost of complying with a remedial order.

Large organisations will be required to pay a fine within 28 days, whereas smaller or ‘financially stretched’ entities can spread payments over a much longer period.

If a defendant makes a quantifiable saving through the commission of the offence, courts are instructed to ‘ensure that the fine removes the profit and imposes an appropriate additional penalty’.

Setting a fine

The SGC appreciates that the application of the guidelines listed above will result in a broad range of fines being imposed. However, in effect, the guidelines provide a starting point for courts to bear in mind when arriving at the appropriate fine.

It is stated that an appropriate fine for corporate manslaughter offences will ‘seldom be less than £500,000 and may be measured in millions of pounds’, while where a health and safety offence has been a significant cause of death, the fine should not fall below £100,000 and may reach ‘hundreds of thousands of pounds or more’.

Reductions to be made in respect of a guilty plea made by the defendant should then be accounted for.

Possible additional orders

There are four additional orders that could be imposed on a convicted defendant in conjunction with the fine.

  1. Publicity orders should ordinarily be imposed for a corporate manslaughter conviction.
  2. Remedial orders should be made in cases where the offender has failed to rectify its failings.
  3. The convicted organisation will normally be ordered to pay the prosecution’s costs.
  4. Orders for compensation should ordinarily be considered by the civil courts, but the guidelines envisage that occasional cases may arise where a court should consider a compensation order in respect of bereavement and funeral expenses.

If a court makes a publicity order, it should stipulate in which medium a public announcement should be made and should consider requiring a statement to be displayed on the company’s website. A newspaper announcement should not be ordered if the trial has received sufficient media coverage, but, where necessary, the order will specify the publication, form of announcement and number of insertions of the required announcement. In certain cases, the court may order the size of the announcement and may specify that any related comment from the company is separated from the announcement itself. The prosecution will provide the court (and serve on the defendant) a draft copy of the suggested order, which the judge should then personally endorse.

Comment

The decision by the SGC to reject a fixed link between a defendant’s annual turnover and the calculation of the appropriate fine to be imposed on it has been criticised by commentators. It has been suggested that a large multinational convicted of corporate manslaughter may now face fines representing less than 1% of its global profits, which may not be an adequate incentive to ensure that its systems and procedures sufficiently protect its employees and the general public.

There also appears to be inherent ambiguity within the guidelines. They provide that fines for corporate manslaughter will ‘seldom be less’ than £500,000, but the fine imposed should not have the effect of putting the defendant out of business. This will create difficulties for a court considering the fine to impose on a small company found guilty of the offence (such as Cotswold Geotechnical Holdings), since a fine of £500,000 would almost certainly be fatal to the continued existence of such a business. While the SGC’s guidelines clearly allow a court to use its discretion to reduce the fine below the threshold in such circumstances, this does raise the question of how useful the stipulated benchmarks will actually prove to be in practice. As a result, the progress of the case against Cotswold Geotechnical Holdings will be subject to close scrutiny as practitioners observe the practical application of the guidelines (and the associated law) for the first time.

Crime, fraud and licensing | 01 June 2010

The Bribery Act 2010 (the 2010 Act) is expected to come into force in October, but it is clear that many companies and their in-house legal teams still have a lot of work to do before they are ready to comply with the new law.

At the end of March, with the new law on the horizon, DLA Piper’s corporate crime and investigations team conducted a Bribery Bill Awareness Survey. The aim of the survey was to accurately gauge whether companies had taken any steps to prepare themselves for the changes to the UK bribery laws. The survey produced some disconcerting results about the awareness of companies for the challenges ahead.

What are the main features of the 2010 Act?

The main features are outlined below:

  • It will be an offence to give or receive a bribe.
  • It will be an offence to promise, offer, request or agree to receive a bribe.
  • It will be an offence to bribe a foreign public official, laying to rest any lingering doubts about overseas jurisdiction.
  • Both the public and private sectors are covered. The new law is not just about bribing public officials; commercial bribery is also criminalised.
  • If a senior officer, or person purporting to act in such a capacity, consents to (is aware and agrees) or connives in (turns a blind eye to) the commission of any of the above bribery offences, the senior officer or person is also guilty of the offence. The senior officer or person must have a connection with the UK, eg a British citizen or ordinarily resident in the UK.
  • A new corporate offence is introduced, which will apply to a commercial organisation that fails to implement adequate procedures, where an act of bribery is committed in connection with its business.
  • The position regarding jurisdiction has also been clarified by the 2010 Act. It has a broad scope and extraterritorial reach, which means that:
  1. any individual ordinarily resident in the UK (whether or not a British national) can be prosecuted for bribery offences committed anywhere in the world; and
  2. any partnership or corporate (whether or not incorporated in the UK) can be prosecuted if it does business in the UK (eg through a permanent establishment, subsidiary or other operation), even if the offence was committed outside the UK.
  • There is no exception for facilitation payments (unlike the position under the US Foreign Corrupt Practices Act 1977).
  • The maximum penalty for individuals will be ten years’ imprisonment and/or a fine.
  • The maximum penalty for a corporate will be an unlimited fine. (The highest fine imposed to date in the UK for a corruption case is £8.5m.)
  • All existing anti-bribery and corruption laws will be repealed.

There will also be collateral consequences associated with any conviction under the 2010 Act, including:

  • director disqualification;
  • company debarment from public procurement; and
  • asset confiscation.

What changes does the 2010 Act bring?

The 2010 Act signals a complete reform of corruption law to provide a modern and comprehensive scheme of bribery offences that will enable courts and prosecutors to respond more effectively to bribery at home or abroad.

For companies, the most important point to note is that there is a new strict liability corporate offence of failing to prevent bribery, which does not require any corrupt intent. This offence will make it easier for the Serious Fraud Office (SFO) to prosecute companies when bribery has occurred. With recent court cases casting doubt on the SFO’s negotiated settlement and plea process, a new opportunity to pursue companies for a specific corporate offence may well be an attractive proposition for the organisation to show its prosecution mettle when the 2010 Act comes into force.

The only defence available to commercial organisations charged with the corporate offence will be for the organisation to show that it had adequate procedures in place to prevent an act of bribery being committed in connection with its business. The fact that adequate procedures are not defined in the 2010 Act led to a great deal of debate in Parliament about how businesses would be able to determine whether or not their procedures were, in fact, adequate. As a result, the draft Bribery Bill was amended so that there is now, at s9, a statutory obligation for the government to issue guidance on what constitutes adequate procedures. The pre-election government pledged to issue the first set of guidelines before the new law comes into force so that businesses will know what is expected of them and the Ministry of Justice is consulting on what guidance to give.

Businesses that do all they can to stay on the right side of the law should have nothing to fear from this legislation. The pre-election government’s overriding objective in introducing the new law was to make companies and individuals take the issue of anti-bribery and corruption compliance seriously.

DLA Piper Survey results

Are companies prepared for the challenge?

The simple answer is that many are not yet ready and some are even unaware that the 2010 Act applies to their business.

DLA Piper sent the survey to over 2,000 people in a wide cross-section of industry sectors. The responses provide a snapshot of the confidence levels of people in senior positions and how ready they feel to start business under the new law.

Which business sectors responded and what was the initial reaction?

The highest number of replies was received from the manufacturing and chemicals industry (11.6%), closely followed by banks and building societies (10.3%). Respondents were asked to comment on the size of their company and 63.7% described their company as large (more than 1,000 employees).

The respondents themselves were predominantly in legal roles: chief or sole legal counsel (25.3%), or in-house legal adviser (37.7%). Other respondents included those in compliance, risk and senior management roles.

Awareness of the new law was mixed, with 37.8% of respondents admitting that their company was either unaware of the Bribery Bill or had not taken much notice of it so far. A few respondents (2.5%) even thought that the Bribery Bill was not applicable to their business.

It is perhaps surprising that although 90% of respondents thought that the board of directors at their company took the issue of anti-bribery and corruption compliance seriously, 40.3 % felt that their company was not ready for the changes and might benefit from external assistance. It appears that even if the tone from the top is good, some companies are failing to follow through at an operational level.

Reactions about awareness and training

Compliance measures will be under the spotlight when the new law comes into force. There are encouraging signs that unauthorised payments to third parties would not go undetected in most companies, with over 75% feeling confident that senior management would be alerted.

However, when it came to the issues of awareness and training the results were mixed, with 44.6% of respondents unable to agree that they already have procedures in place to ensure that employees, subsidiaries, agents and other business partners are ready to comply with the new law. It is somewhat disconcerting that there was a small number (5.9%) who thought that this issue was not applicable to them, perhaps not realising that it also applies to conduct in the UK. Given these responses it may not be surprising that 42.8% of respondents were not confident that their colleagues would know what to do if an allegation of bribery or corruption surfaced at their company.

Policies, procedures and training are all part of an effective anti-bribery and corruption programme. Any company that finds itself caught up in an investigation or prosecution will find it difficult to show that they have adequate procedures if they have neglected the basic step of educating and training their staff.

Far-reaching consequences

An absence of compliance measures could also affect a company’s ability to do business with others. An increasing number of international businesses are requiring reciprocal contractual undertakings that neither they nor anyone who they assign to do work on their behalf will engage in corrupt practices. When the new law comes into force there will be even more incentive for anyone doing business in the UK to comply with the 2010 Act. In some cases companies will even be asked by prospective customers or clients to provide documentary evidence of the steps they have taken to prevent bribery and corruption.

Those companies doing business overseas will perhaps face the strongest challenges under the new law, with 60.5% of respondents still having the perception that there are places in the world where it would be difficult to do business without paying a bribe.

Self-reporting

Finally, the survey also asked whether companies that discover corruption within their operations should always come clean and self-report to the SFO. In the light of the SFO’s call for companies to come forward and co-operate, it was interesting to see that 63% of respondents feel that this would be the right course of action. However, a significant number thought that you should not be so keen to co-operate in this way or thought it was not applicable to their business. Companies who encounter this type of dilemma are often faced with a difficult decision and it is important that they are fully aware of the risks in both situations:

  • Regulators have more ways than ever before of finding out about criminal behaviour and there is always the danger of someone in the company blowing the whistle. Deciding not to self-report can bring greater disruption to the business (for example search and seizure raids) and greater punishment.
  • Self-reporting can bring benefits, such as a civil settlement, rather than a prosecution, but this is by no means guaranteed.

When faced with self-reporting issues companies should ensure that they are fully informed at the earliest opportunity about the options and consequences by taking specialist legal advice from those who are used to dealing with the SFO and other regulators.

Summary of results

The DLA Piper survey has revealed that, with just five months to go until the 2010 Act comes into force, there are many companies out there that are not yet fully prepared for the introduction of the new legislation and there are some who do not yet acknowledge that this legislation is of relevance to the way they do business. For many companies there is significant work to be done before they are in a position to demonstrate that they take anti-bribery and corruption compliance seriously, and have the necessary procedures, systems and controls in place to prevent bribes being paid in connection with their business.

Although the pre-election government was set to issue guidance on what constitutes adequate procedures in due course, companies must start reviewing their practices and procedures as a matter of priority, especially as no-one knows what lies ahead in the now uncertain political arena.

What do companies need to do now?

If companies want to avoid falling foul of the new law they will have to develop compliance procedures appropriate to their own circumstances and business sectors, taking into account their size, their area of operations and the particular risks to which they might be exposed.

The guidance on adequate procedures is expected before Parliament’s summer recess begins on 22 July. It will give general guidance, not rigid rules, which will set out several key principles to help commercial organisations to prevent bribery. A key focus for larger organisations will be the responsibility of a corporate board of directors to design, implement and regularly review policies for preventing bribery. The pre-election government expressed views that adequate procedures means:

  • a board of directors taking responsibility for anti-corruption programmes and appointing a senior officer accountable for its oversight;
  • assessment of risks specific to the company and its business, including risks linked to the nature or location of the organisation’s activities;
  • establishing clear policies and procedures, and training new and existing staff in anti-bribery procedures;
  • having robust internal financial controls and record-keeping to minimise the risk of bribery; and
  • establishing whistleblowing procedures so that employees can report corruption safely and confidentially.

What are the features of an effective anti-corruption compliance programme?

As globalisation continues and companies seek to maintain market share, looking to new and emerging markets overseas, exposure to legal, reputational and financial risks has risen sharply. Global regulatory enforcement action for bribery and corruption has increased in the past five years, and this trend looks set to increase, with regulators and prosecutors using all the powers at their disposal. Enforcement action has also raised the profile of compliance programmes, with compliance monitors being imposed on companies by some prosecutors and regulators as part of negotiated settlements.

Although many in-house lawyers are involved in various aspects of compliance, there will be many in the UK for whom this is a new responsibility or area of expertise. Companies will be expected to have an anti-bribery and corruption programme that is tailored to and appropriate for its size and risk profile. What does this mean in practice? How does a company start from scratch? How does a company start to review its existing programme?

There are five main steps to building an effective compliance programme:

  1. Gaining board and senior management commitment to conducting business in a fair, honest and ethical manner:
    • As with most management challenges companies will need clear leadership from the highest level.
    • The tone must come from the top, with a clear statement that the company is taking an ethical stance and will not tolerate bribery and corruption in any form, whether direct or indirect.
    • If allegations surface, the board and senior management need to be prepared to act. It is no longer acceptable to turn a blind eye.
  2. Understanding where the corruption risks lie and the potential impact for the business:
    • Companies needs to conduct a thorough risk assessment.
    • They must understand the law in every country where they have operations and should take specialist legal advice, where necessary, to understand compliance obligations at a local and international level.
    • Risk assessments should also address ethical, reputational and cultural implications.
  3. Developing well-designed policies, procedures and controls tailored to the current business environment:
    • Companies need well-designed, comprehensive and targeted programmes to ensure compliance with relevant anti-corruption laws.
    • A senior individual (with a dedicated compliance team, depending on the size of the organisation) should be appointed to lead the process.
    • The programme then needs to be implemented and embedded into the company processes, including the disciplinary procedures. Disciplinary sanctions should be enforced in a swift, consistent, open and transparent process
  4. Communicating the policy to employees, stakeholders and business partners:
    • Companies need to ensure that the programme is properly implemented and that there is a continuous communication at every stage.
    • Passive publication of an anti-corruption policy is never enough.
    • There should be a comprehensive local training programme for all employees, not just head office, compliance or legal staff.
  5. Continuing to monitor, evaluate, reassess and take remedial action where required:
    • Companies cannot afford to sit back and think that the job is done. There needs to be an ongoing plan to keep the programme alive going forward.
    • As different real life situations emerge, the strengths and weaknesses in the programme need to be identified and analysed.
    • Action needs to be taken to respond to legislative or business developments.

What if a company already has anti-corruption measures in place?

Even if companies have anti-corruption measures in place there are some key questions that should be asked:

  • When were the anti-corruption policies written? Do they need to be updated?
  • Are the anti-corruption policies adapted for the various jurisdictions in which the company conducts business?
  • Are due diligence procedures conducted on all people that the company deals with, whether they are employees, agents, contractors, suppliers or new business partners? Does the company have anti-corruption clauses in contracts? Does it monitor what is paid and how, whether the fees are proportionate to what they do or how they were introduced to the company?
  • Does the company regularly monitor current trends and recent investigations into bribery and corruption-related activities?
  • Does the company have a process in place to monitor and evaluate the effectiveness of its policies, systems and procedures?
  • Has the company commissioned an independent audit of its systems and controls for detecting improper payments?
  • Does senior management communicate a positive message concerning anti-corruption?
  • Do employees and business partners know what is expected of them?
  • How often are employees required to participate in training?
  • Do employees know how to report suspicions of corruption? Can whistleblowers feel confident that reporting improper payments or other illegal activities will not result in repercussions for them personally?
  • And, finally, if the worst should happen and the company becomes the subject of a corruption allegation, does it have a crisis management plan? Would personnel know what to do if the SFO decided to raid and search the premises?

Whether setting up a new programme or reviewing an existing one, it is important to remember that an effective anti-corruption programme should be capable of persuading a regulator or prosecutor that the company is taking the issue seriously and has addressed all of these questions.

clock is ticking

Many companies will have been monitoring the development of the 2010 Act as it progressed through Parliament and will have already set the review process in motion. Others who have been biding their time or have been largely unaware of the need for enhanced anti-corruption compliance must take action now. In-house lawyers have a vital role to play in raising internal awareness of the new law and stressing the importance of reviewing training programmes, procedures, systems and controls. It is only by taking steps to mitigate the risks of employees, subsidiaries and agents paying bribes on their behalf, that companies can hope to remain out of the corruption spotlight.

Crime, fraud and licensing | 01 May 2010

The new zealous and robust approach adopted by the Serious Fraud Office (SFO) to combat corporate fraud and corruption offences has been increasingly described as the Americanisation of the organisation. The US Department of Justice (DoJ) and Securities and Exchange Commission (SEC) (equivalent to the SFO and Financial Services Authority (FSA) here) have made anti-corruption enforcement history – the biggest of scalps being Siemens who lost out financially to the tune of €2.5bn.

new approach to corporate compliance and enforcement

In mid-2009 two sets of guidelines were issued (‘Approach of the Serious Fraud Office to dealing with Overseas Corruption’ (the SFO’s guidelines) (21 July 2009) and ‘Attorney General’s Guidelines on Plea Discussions in Cases of Serious or Complex Fraud’ (18 March 2009)). As a response to the De Grazia Review (by US lawyer Jessica De Grazia), which excoriated the SFO’s poor prosecution record, the organisation has not only stepped up enforcement of overseas bribery offences, it has adopted a wholly new US-style approach, encouraging:

  • corporate self-regulation;
  • self-reporting if wrongdoing is uncovered; and
  • continued monitoring.

This mirrors a style of enforcement more familiar to US companies.

The SFO’s guidelines set out several factors that it takes into consideration when deciding the appropriate route to take. These include whether any existing board members have personally connived in the corrupt activity or derived personal benefit from it. The SFO’s guidelines are similar to US government guidelines, the ‘Holder Memo’ (Memorandum from Eric Holder, Deputy Attorney General US DoJ), published in 1999 in an attempt to recognise and address uncertainty surrounding the same issue.

In cases where the reported wrongdoing is perceived to be of too serious a nature to justify a civil settlement, the SFO took the view that it could nevertheless engage in negotiations with the corporate, and other US regulators and prosecutors, to carve out a global plea agreement. That approach was adopted in SFO v BAE Systems plc (2010) and R v Innospec Ltd [2010], but has come in for criticism. On 26 March 2010, Thomas LJ’s sentencing of Innospec, reminded the SFO that it had no power to agree corporate pleas with both the company and the US prosecutors, nor could it expect the courts in the UK to rubber-stamp agreements. In his sentencing remarks, Thomas LJ also expressed the view that it would rarely be appropriate for criminal conduct by a company to be dealt with by way of a Civil Recovery Order (CRO).

The assurance that, by self-reporting, the errant company will stand more of a chance of obtaining a civil settlement, or the equivalent of a US-style deferred prosecution agreement (DPA) or non-prosecution agreement (NPA), is a major incentive for the company. But the SFO is now somewhat restrained by its inability to enter into global plea agreements.

Despite the Innospec ruling, if the SFO decide that it is more sensible to take the civil path against the companies and prosecute only individuals where appropriate to do so, part of any negotiated deal with the offending corporate will be the agreed placement of a corporate monitor for a set number of years. The corporate monitor will watch over the activities of the board and its senior managers, and will report back to the SFO on corporate crime and compliance issues.

US Approach

In the US, the government’s approach to the appointment of a corporate monitor is now well established and has evolved over the past 25 years. Initially the court, as a result of post-judgment action, appointed an overseer to ensure compliance with any cease and desist orders. More recently the appointment of a corporate monitor has become a standard step taken by the DoJ and by the SEC in the US, before any court verdict is announced. The monitor’s ambit is dictated by the terms of the DPA or the NPA under which the government agrees settlement terms with the corporate, but retains the right to prosecute any subsequent breach of such terms.

The first landmark case was US v Prudential Securities Inc (1994), after which the use of an independent expert, whose role was to monitor the compliance of the company as part of the DPA, was increasingly relied on in settlements.

The incentive for corporations to settle before going to trial was bolstered by the George W Bush administration when it adopted a policy that allows companies to quietly avoid criminal prosecution in exchange for a probationary agreement to make certain internal reforms.

In SEC v WorldCom Inc (2002), the monitor’s efforts were initially directed at preventing corporate looting and document destruction, but then expanded to that of overseer initiating controls and corporate governance. In 2008 the DoJ issued guidelines relating to the appointment and use of corporate monitors, which set out nine basic principles (‘Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations’, 7 March 2008). The guidelines were issued in response to increasing criticism levelled at a lack of transparency in the selection process and cost levels of corporate monitors.

As there are no equivalent guidelines for this new process issued by the SFO, the principles are instructive as to the likely scope and role of any corporate monitor appointed in this jurisdiction (particularly as, increasingly, deferred prosecution settlements are likely to be made in conjunction with authorities in other jurisdictions).

The principles, in summary, are as follows:

  • Selection – monitors should be appointed on merit, with the specific factual situation in mind and to ensure the avoidance of any conflict.
  • Independence – a monitor is an independent third party, not an employee or agent of the corporation or of the government.
  • Role – the monitor’s primary responsibility should be to assess the corporate’s compliance with the DPA or NPA. They do not have responsibility to the shareholders. As such, while they can provide their input, the responsibility for compiling and implementing an effective compliance programme remains with the corporate.
  • Communication – open communication between the government, the corporate and the monitor is expected, and, in some circumstances, written reports may be made to both parties.
  • Corporate action – where the corporate does not adopt suggested recommendations, this should be reported to the government, along with the reasons given. This may be taken into account by the government when considering whether the corporate has fulfilled its obligations under the DPA or NPA.
  • Other misconduct – the DPA or NPA should set out the types of previously undisclosed and/or new misconduct that should be reported directly to the authority (including, in some circumstances, without the knowledge of the corporate).
  • Duration – this will depend on several factors to be considered in each case, including the seriousness of the wrongdoing, the corporate culture and the involvement of senior management.
  • Flexibility – the term may be extended or reduced depending on the process.

Application in the UK

The SFO does not have the power unilaterally to impose a corporate monitor. Therefore, such appointment has to be as part of a civil agreement between the parties and/or through the criminal courts. There is little doubt that both the SFO and the company have strong incentives to settle the case without the need to involve the criminal courts. For the government, corporate criminal cases are difficult, complex and expensive to prosecute. Corporations usually have access to greater resources than the average criminal defendant, which increases the likelihood of a vigorous defence. For the company, the advantages of settling early and avoiding charges are significant too, limiting amongst other things, severe reputational losses.

According to the SFO guidelines, one of the aspects that the SFO will consider following a self-report is whether:

‘At the end of the investigation… the corporate [will] be prepared to discuss resolution of the issue on the basis, for example, of restitution through civil recovery, a programme of training and culture change, appropriate action where necessary, and at least in some cases external monitoring in a proportionate manner.’ [Emphasis added.]

The SFO further sets out that monitoring will be by:

  • ‘an independent, well-qualified individual nominated by the corporate and accepted by us’;
  • that ‘the scope of the monitoring will be agreed [with the SFO]’; and
  • that it will be ‘proportionate to the issues involved’ (paragraphs 4 and 14 of the SFO’s guidelines).

Such is the extent of the existing SFO guidance in this area.

The few cases where a monitor has been appointed in this jurisdiction offer little by way of further instruction. A brief look at recent law provides an overview of the sort of cases in respect of which a monitor might be appropriate.

SFO v Balfour Beatty plc (2008)

The SFO reached a civil settlement with Balfour Beatty under its new civil recovery powers in 2008, in the first case of this kind. Balfour Beatty self-reported payment irregularities by its subsidiary in relation to a construction project in Egypt. Balfour Beatty agreed to a settlement payment of £2.25m, together with a contribution towards the costs of the CRO proceedings. It also agreed to introduce certain compliance systems and to submit these systems to a form of external monitoring, for an agreed period.

R v Mabey & Johnson Ltd (2009)

The SFO and the company entered into a criminal plea negotiation that was agreed by the criminal court. This was the SFO’s first criminal conviction for overseas corruption since the implementation of the Anti-Terrorism, Crime and Security Act 2001. It was also the first time that the appointment of corporate monitor was approved by the criminal courts. The company pleaded guilty to the making of corrupt payments in Ghana and Jamaica, and to the breach of a United Nations embargo on trade with Iraq. Penalties of approximately £6.6m were imposed (which incorporated fines, a sum for confiscation, reparations to the countries impacted and a contribution to the SFO’s costs). Also included in this sum was a provision of £250,000 for the appointment of an independent corporate monitor for a period of three years.

Innospec

The company pleaded guilty to conspiracy to corrupt in this jurisdiction and entered pleas to violating the Foreign Corrupt Practices Act (FCPA) 1977 in the US. A global settlement was agreed between prosecuting bodies and the offending company.

As part of its plea agreement, Innospec agreed to hire an independent monitor to review and evaluate internal controls, record-keeping, and compliance practices. Monitors, who are generally attorneys, have become commonplace in plea agreements and deferred prosecution agreements, stemming from FCPA 1977, money-laundering and other charges. While the DoJ frequently assists in selecting a monitor, they leave it up to the company to set a fee.

The appointment of the monitor and the likely cost was criticised by the district judge in the US. This indicates the ongoing difficulties with the appointment and control of independent monitors in the US, and it is a problem that is also likely to arise here.

The SFO appears to have agreed to share that monitor’s reports, although for what purpose (since it had prosecuted the company) it is difficult to comprehend.

Practical Considerations

It is still early days in the UK. Monitors are being appointed post charge, or as part of a civil deal, rather than early on, post self-report and with a view to assisting with settlement. The recent judgement in Innospec will inevitably force the SFO to look at several issues again and will predictably steer it further towards a US-influenced approach.

It is likely that the concerns that have arisen in the US are also likely to resonate here. Key considerations are likely to be:

  • Appointment – does the appointed individual have the necessary experience and sector understanding to enable them to properly assess and evaluate the corporate’s policies and systems?
  • Cost – is the level of projected cost proportionate to the level of seriousness of the wrongdoing?
  • Duration – is the length sufficient to enable the corporate to demonstrate that its compliance procedures are being properly implemented and not too long to cause financial difficulties?
  • Role and scope – is the scope sufficiently clear as to the role of the monitor, including which aspects of the day-to-day operation of the company they will be expected to be appraised of to fulfil their duties? Is the scope sufficiently tightly worded to avoid any unnecessary duplication of duties?
  • Fiduciary duties – does the monitor have duties towards vulnerable shareholders, whose assets they are monitoring?
  • Confidentiality – is the monitor bound by confidentiality as between the SFO and the corporate (this may be directed by the obligations of the company to report to its shareholder as to the progress being made)?

Comment

Corporate monitors assist with the elimination of corporate wrongdoing and will predictably become more common in the UK, as new approaches to dealing with corporate offences, particularly bribery and corruption, evolve. The role of the those at the top of a company and their duties to prevent wrongdoing has been emphasised by the ‘Walker Review of Corporate Governance of the UK Banking Industry’ (by Sir David Walker) and by the Financial Reporting Council. The FSA has also increased the pressure on, and raised expectations of, non-executive directors of FSA-regulated firms. Looking further down the track, the emergence of a market for specialist non-executive directors or professional supervisors to monitor compliance is not an unrealistic prospect.

Crime, fraud and licensing | 01 April 2010

In principle, there can be no argument that someone who commits an offence in one country should be able to avoid justice by fleeing to another. Generally, it is likely to be in the interests of justice for the trial to take place in the country where the crime was committed. Provided that fundamental human rights are guaranteed, that there is a fair trial and that the offence is not motivated by political, racial or other improper considerations, the offender ought to be returned to face justice. Extradition reform over the past 25 years has sought to put such principles into effect, culminating in the Extradition Act 2003 (the 2003 Act). [Continue Reading]

Crime, fraud and licensing | 01 March 2010

It is a well-established practice that companies carry out merger and acquisition (M&A) due diligence using a suite of questions and documentary information requests aimed at establishing legal, financial and reputational risks. However, as enforcement trends in corruption are a relatively recent phenomenon, proper and thorough anti-corruption due diligence is often overlooked. [Continue Reading]

Crime, fraud and licensing | 01 March 2010

As an increasing number of criminal offences are now covered by the confiscation regime, Caroline Lee (left) and James Moss (right) look at how the legislation has been used and provide guidance for in-house lawyers who may face the consequences

Many jurisdictions have legislation that permits regulators to confiscate assets obtained by those convicted as a result of their criminal conduct. Since being introduced in England and Wales in the late 1980s, the confiscation regime has expanded to cover a wider range of criminal offences. This tool has been given to a large number of prosecutors, who have used it with vigour.

Corporations and their legal advisers must therefore be alive to the implications of the regime because it can be used as a form of corporate ‘capital punishment’ by ordering firms to pay large sums of money, forcing them into insolvency. This is a stark contrast to the level of fines traditionally handed down by the British courts. Company directors facing prosecution should also be aware that default on payment of a confiscation order can lead to lengthy terms of imprisonment.

The current regime is set out in the Proceeds of Crime Act (POCA) 2002, a lengthy and tortuous act of parliament that came into force in March 2003. It is judicially recognised as draconian and is drafted so as to severely limit any judicial discretion that might mitigate its effects.

To complicate matters further, for offences wholly or partly committed before March 2003 one of two other regimes may apply. The consequences of falling within the earlier regimes are significant, and must be considered by defendants and their advisers as an important strand of any strategy for dealing with a potential prosecution.

This article seeks to explain and highlight some of the complexities of the law as it applies today, together with its effect and possible use by prosecutors.

Confiscation of assets

The confiscation of assets obtained as a result of criminal conduct is, in principle, a reasonable and proportionate response by the state to acquisitive crime. Prosecutors were first given the power to confiscate assets in the 1980s. The legislation was designed to deprive drug barons and career criminals of the proceeds of their unlawful conduct. However, over the following 20 years the regime has expanded beyond recognition. In 2009 a new tranche of regulators were given powers to confiscate the assets of convicted defendants. The list now includes:

  • Counter Fraud and Security Management Service of the NHS;
  • Department for Business, Innovation and Skills (BIS);
  • Department for Work and Pensions (the DWP);
  • Environment Agency;
  • Financial Services Authority (FSA);
  • Gambling Commission;
  • Gangmasters Licensing Authority;
  • Local authorities in England and Wales;
  • Medicines and Healthcare products Regulatory Agency;
  • Office of Fair Trading (OFT);
  • Revenue and Customs Prosecutions Office;
  • Royal Mail;
  • Rural Payments Agency;
  • Serious Fraud Office (SFO);
  • Transport for London; and
  • Vehicle and Operator Services Agency.Where a confiscation order is made by the court, the prosecuting agency can receive up to 50% of the amount obtained. In times of economic recession, and when impending budget cuts are affecting government departments and agencies, it is easy to see why asset recovery is being increasingly utilised by prosecutors.

    The Times reported in October 2009 that the Home Office had set a yearly £250m asset seizure target for 2010, rising to £1bn per annum thereafter. If this were not incentive enough for prosecutors, it was also reported that many officers received personal performance bonuses for hitting asset recovery targets.

    Confiscation orders have been made following prosecutions by the SFO, the OFT, the Department for Business, Enterprise and Regulatory Reform (now BIS), local authority trading standards, the DWP and the Environment Agency. Since November 2007 the Environment Agency and partners are said to have confiscated more than £1.5m from environmental polluters. Given the financial incentives, no doubt it is only a matter of time before others seek to exercise their powers.

    Three regimes

    Confiscation proceedings are governed by three different regimes, depending on the dates of the criminal conduct involved.

    Regime 1: Criminal Justice Act 1988 (the 1988 Act)

    For offences that took place wholly or partly prior to 1 November 1995, regime 1 will apply. Here, a Crown Court judge can only make a confiscation order if the prosecution lodges a formal request. Once a request has been made the judge has the discretion to:

    a)decide whether or not to make the order; and

    b)decide the amount payable, ‘as they see fit’.

    under regime 1

    In September 2009 the SFO obtained a confiscation order under regime 1 in the sum of £1.1m against Mabey & Johnson for corruption and breach of economic sanctions. The total value of the contracts said to have been obtained as a result of bribery was £60m. If the case had been decided under either of the other two regimes, a starting figure for any order would have been £60m.

    Regime 2: the 1988 Act, as amended by Proceeds of Crime Act 1995

    For offences committed after November 1995 the confiscation regime is far more draconian:

    • The court must conduct a confiscation enquiry if the prosecutor requests it. It may also do so of its own volition.
    • The court has no discretion in determining the amount to be confiscated and the calculation of benefit is arithmetically determined by statute.
    • The lifestyle provisions put property held or obtained by the defendant in the six years prior to proceedings at risk of confiscation. The lifestyle provisions are widest under regime 3.
    Regime 3: POCA 2002

    Confiscation under POCA 2002 is a five-step process:

    1. The court must conduct a confiscation enquiry if the prosecutor requests it or the court can proceed of its own volition.
    2. The judge must decide whether the defendant has a criminal lifestyle (see description on p5).
    3. The judge must then determine whether the defendant has benefited from criminal conduct. If the defendant has a criminal lifestyle this triggers a historical enquiry into the defendant’s general criminal conduct. If the defendant does not have a criminal lifestyle the judge considers the benefit from the offences that the defendant has been convicted of.
    4. The judge determines the gross value of benefit from the defendant’s criminal conduct. If there is a criminal lifestyle then the judge must apply the relevant assumptions. The burden of disproving an assumption is on the defendant.
    5. The judge must make a confiscation order in the sum of the benefit unless the defendant can prove that the value of all their existing assets (the ‘available amount’) is less, in which case the court will make an order in that amount.
    6. A period of imprisonment in default of payment will be imposed.

    Draconian effect of POCA 2002

    Confiscation involves a forensic assessment of the benefit obtained from the offences committed by a company and its ‘realisable assets’, ie the means at its disposal to pay the order. Once proceedings are set in motion there is little discretion involved:

    ‘The making of an order is mandatory and its amount is arithmetically determined but cannot be moderated by judicial discretion.

    It also follows that, not infrequently, and perhaps even ordinarily, the amount of money confiscated will exceed the profit made by the criminal from their offence.’ (Shabir v R [2009])

    POCA 2002 is draconian, setting out strict rules regarding how the amount of the order is to be calculated. This is an arithmetic exercise without discretion, even where the amount confiscated is far greater than any actual gain (see ‘Under POCA 2002’, on p6).

    POCA 2002 is intended to deprive defendants of the benefit they have gained from criminal conduct, whether or not this benefit has been retained. The benefit is calculated as the total value of the property or advantage obtained, not net profit (see the case example below).

    recent fsa action

    In December the Financial Services Authority (FSA) completed its second criminal prosecution for insider dealing. The trial resulted in two individuals, Matthew and Neel Uberoi, receiving custodial sentences. The FSA also sought a confiscation order under the Proceeds of Crime Act (POCA) 2002.

    Matthew Uberoi was an intern at a corporate broking firm, working on takeovers and other price-sensitive deals. On several occasions he passed inside information to his father, Neel Uberoi. Neel Uberoi then purchased shares in the relevant companies, making £110,000 profit.

    Neel Uberoi received a two-year custodial sentence and Matthew Uberoi received one year. Neel Uberoi’s net profit totalled approximately £110,000. Testar J held that the benefit was the full worth of the shares purchased, £288,050.05.

    Criminal lifestyle

    Under POCA 2002 the court is required to make lifestyle assumptions where the defendant is deemed to have a criminal lifestyle. These can be applied:

    1. where a defendant’s conduct forms part of a course of criminal activity (ie continues for a six-month period, involves a conviction for three or more offences, or two previous relevant offences); or
    2. where there is a conviction for certain specified offences, the most relevant being money laundering (this can be charged where money or assets obtained from criminal conduct are transferred or used in some way by the defendant).

    It is relatively easy for a defendant to come within these provisions. Many confiscation matters are currently dealt with as lifestyle cases. Once a defendant has been deemed to have a criminal lifestyle the court is required to make four assumptions. These are:

    1. any property transferred to the defendant at any time after the relevant date (six years before the start of criminal proceedings, which is generally taken as the date of charge) was obtained as a result of criminal conduct;
    2. any property held by the defendant at any time after their conviction was obtained as a result of criminal conduct;
    3. any expenditure incurred at any time after the relevant date was met from property obtained from criminal conduct; and
    4. any property obtained by the defendant was received free of any other interest.

    The implications of such a finding can be severe (see ‘Case of X: part 1’, on p6).

    Case example

    In R v Neuberg [2007] EWCA Crim 1994 Clive Neuberg had traded under a prohibited name contrary to the Insolvency Act 1986. The benefit of his criminal conduct was determined as the gross turnover of the company for the relevant period, not the net profit.

    Tainted gifts

    Tainted gifts are another extremely problematic issue. The realisable amount includes the value of any property held to be a tainted gift, defined as any transfer at undervalue after the date the offences commenced. Where assets are transferred to third parties at an undervalue and are subsequently dissipated, they are still classed as a tainted gift. The defendant is then ordered to pay the equivalent amount, even if the asset is worthless or has vanished (an example is shown in the box below).

    tainted gifts

    In 2009 Y, a former civil servant, was convicted of fraud offences occurring in 2005 leading to confiscation proceedings.

    In 2006 Y sold their house to their daughter for £300,000.

    A valuation obtained by the prosecution showed the market price in 2006 was £350,000. Accordingly the house was held to have been sold at an undervalue and was therefore a tainted gift.

    A valuation of the house in 2009 showed that the house had fallen in value to £250,000. Nevertheless, the confiscation order of Y was increased by £50,000 because the gift was valued at the time it was given.

    What if the defendant cannot pay?

    Enforcement of confiscation orders is equally harsh. There is a sliding scale of imprisonment in default of payment linked to the amount of the order. This starts at seven days for amounts under £200, rising to ten years for amounts exceeding £1m. Any period in default:

    • is distinct from the sentence for the substantive offence;
    • can far exceed the original sentence; and
    • would be served consecutively.

    While a defendant only serves half of the default period, the provisions for early release from normal custodial sentences do not apply (see ‘Case of X: part 2’, on p6).

    On release from serving a default sentence the debt is not extinguished. It remains indefinitely, with 8% interest accruing from the date when the order fails to be paid. While a defaulter cannot be sent to custody again for failing to pay the original amount they can, in principle, be sent back to prison for failing to pay the interest.

    Directors and companies

    Confiscation orders are regularly made against company directors.

    In August 2009 the Environment Agency obtained a confiscation order of £234,393 against two directors of a waste management company following prosecution for controlled waste offences. Each received a conditional discharge for two years for the substantive offence and three years custody in default. The company was given no separate penalty but was ordered to pay full prosecution costs.

    The courts have also confirmed that confiscation is equally applicable to corporate defendants.

    In 2006 London Boroughs of Brent and Harrow Trading Standards (Brent and Harrow) convicted Alami International Ltd for offences in relation to the sale of counterfeit goods. The company was fined £24,000 and was ordered to pay £23,500 in costs for eight offences under the Trade Marks Act 1994.

    Working with the London branch of the Regional Assets Recovery Team, Brent and Harrow obtained a confiscation order of £400,000 under POCA 2002.

    Under POCA 2002

    If there are four defendants to an offence of fraudulently obtaining a loan of £100,000, the court must hold that each has benefited in the sum of £100,000. Each defendant would, subject to their available assets, be ordered to pay £100,000. The state could therefore recover £400,000.

    case of x

    Part 1

    Defendant X is an international businessperson and director of several companies. X was convicted of laundering £190,000 in 2010. X was automatically assumed to have a criminal lifestyle.

    X was charged in 2006. The court therefore considered all money and property passing through their hands since 2000 to be from criminal conduct. The benefit figure was calculated at approximately £11m.

    Because of the criminal lifestyle assumption, X had to prove that the £11m passed through the accounts legitimately by providing a detailed explanation of every entry over £1,000 in every personal and company bank account used during that ten-year period.

    X was able to prove that £10m passed through the accounts legitimately. Criminal benefit was therefore determined to be around £1m. The £190,000 that X laundered therefore resulted in a confiscation order of £1m because it could not be proven that the additional money was obtained legitimately.

    Part 2

    X was sentenced to four years in custody for the offence of money laundering. This led to an early release with an electronic tag after less than two years.

    Because X was ordered to pay £1m in confiscation, they were liable to face a default sentence of up to ten years. In fact, following submissions, X was given a default sentence of five years. If X defaults on payment they will be liable to serve two and a half more years, a period greater than that already served for the substantive offence.

    Case of x

    Part 1Defendant X is an international businessperson and director of several companies. X was convicted of laundering £190,000 in 2010. X was automatically assumed to have a criminal lifestyle.

    X was charged in 2006. The court therefore considered all money and property passing through their hands since 2000 to be from criminal conduct. The benefit figure was calculated at approximately £11m.

    Because of the criminal lifestyle assumption, X had to prove that the £11m passed through the accounts legitimately by providing a detailed explanation of every entry over £1,000 in every personal and company bank account used during that ten-year period.

    X was able to prove that £10m passed through the accounts legitimately. Criminal benefit was therefore determined to be around £1m. The £190,000 that X laundered therefore resulted in a confiscation order of £1m because it could not be proven that the additional money was obtained legitimately.

    Part 2X was sentenced to four years in custody for the offence of money laundering. This led to an early release with an electronic tag after less than two years.

    Because X was ordered to pay £1m in confiscation, they were liable to face a default sentence of up to ten years. In fact, following submissions, X was given a default sentence of five years. If X defaults on payment they will be liable to serve two and a half more years, a period greater than that already served for the substantive offence.

    Can a confiscation order be limited by agreement with the prosecutor?

    Where a corporate defendant is facing prosecution for any offence that has produced a financial benefit, advisers must assume that the relevant prosecutor will seek a confiscation order. Before accepting any corporate liability, it is important to consider the impact of the relevant regime. While there may be some room for manoeuvre to control the effects of the confiscation regime – on the basis of the charges laid, the agreed facts and any financial statements put before the court – the fact that the quantum of benefit and realisable assets are agreed between the prosecutor and a potential corporate defendant will not and cannot, in itself, bind a Crown Court judge in confiscation proceedings.

    The judge is positively obliged to investigate any agreement between the prosecution and defence as to the appropriate quantum of any confiscation order, and to reject it if it is not in accordance with the statutory scheme.

    For most corporate advisers it will be counterintuitive to admit misconduct over a prolonged duration. However, when it comes to confiscation this could be advantageous as offences dealt with under the earliest of the three regimes would have the benefit of judicial discretion.

    Conclusions

    This is an extremely complex and constantly evolving area of law. As can be seen in the examples of this article, the potential consequences for both individuals and companies can be serious. In worst-case scenarios long periods of custody for individuals and extremely large financial penalties can result from the confiscation regime.

    All indications point towards the increasing use of confiscation powers by a larger number of regulatory bodies. Once confiscation proceedings are set in motion the courts have very limited powers to stop them and limited discretion to alter the ultimate outcome. It is therefore a worrying development that agencies that may have little or no experience of bringing confiscation proceedings are now empowered to do so.

    The key point for any individual or company potentially facing a prosecution where a confiscation order may be made is to seek specialist advice at an early stage.

    Very important strategic decisions must be taken under advice. When deciding whether to plead to any offence, the impact on confiscation must be considered. For advisers negotiating any basis of plea, the facts on which a conviction is based must be carefully agreed.

    Confiscation and prosecutorial policy: SFO

    The lack of discretion under POCA 2002 may also hamper the efforts of prosecutors to meaningfully engage with corporates. The SFO’s director, Richard Alderman, is trying to encourage companies to self-report past wrongdoings for overseas corruption.

    Self-reporting corruption is all well and good for those companies who manage to negotiate a Civil Recovery Order, such as Balfour Beatty and AMEC. The advantage here is that the settlement is largely in the hands of the SFO, the corporate defendant and its advisers. There is no conviction or complex confiscation proceedings to contend with. This is not so with criminal settlements if the fact pattern means that either of the later two regimes apply.

    If the practice of self-reporting and plea discussions is to be supported and encouraged by corporates and their advisers, the challenge of finding a pragmatic approach to the issue of confiscation must be met.