Legal Briefing

Deferred Prosecution Agreements and a tough new director at the SFO: is a rush to the negotiation table in order?

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Crime, fraud and licensing | 01 July 2012

After many months promoting the introduction of Deferred Prosecution Agreements (DPAs) in the UK, the solicitor general, Edward Garnier QC, is close to securing his goal. With strong government backing, the support of the incoming director of the Serious Fraud Office (SFO), and, according to Mr Garnier, of the city firms and non-governmental organisations he has consulted, he is confident they will be introduced in the UK by the end of the year, following a consultation period that ends in August.

At the same time, David Green QC has taken over at the SFO and signaled the end to an era in which ‘the perception has emerged… that perhaps there’s more willingness to compromise than to prosecute’. He has pledged to ‘rebalance the relationship between prosecution and civil settlement’ and reminded the SFO that it is ‘primarily a crime-fighting agency’1.

Are we, then, entering a new era in which the SFO will be in the ascendant and corporates accused or aware of wrongdoing will need to rush to the negotiating table at the earliest opportunity in order to defer prosecution? While that has long been the approach in the US, from where the DPA import hails, there are many reasons why that may not be the result. While a potential short cut to the billions of dollars in fines emanating from DPAs in the US may look extremely alluring to Mr Garnier, there are key differences in both the judicial and prosecutorial landscape, and indeed the law, in the UK which mean that corporate entities may be very circumspect about the opportunity to agree a DPA.

It is easy to appreciate the keenness of the government to adopt this new ‘tool’ and its potential to relieve pressure on hard-pressed prosecution resources by offering an incentive for corporates to self-report, co-operate and negotiate. The danger is, however, that the SFO has gone rather too far in recent years under the stewardship of its previous director in its willingness to assist co-operative corporates. It is an approach that could easily be perceived as the latest manifestation of its inability, for various reasons, to prosecute serious and complex frauds, a factor that is at the very core of the simple equation set out a paragraph 121 of the consultation paper issued in May:

‘In voluntarily entering into a DPA, commercial organisations themselves would have to balance the risk of self-reporting issues to prosecutors which are likely to be put into the public domain at some point, against the risk of discovery, and potential prosecution, if they do not self-report at all’.

The simple fact is that there may be very little take up of DPAs unless there is a genuinely credible threat of successful prosecution for those who decline to take such a path. Indeed it is unclear how effective the ‘carrot’ of non-criminal settlement was really proving, even when that was accompanied by considerable confidentiality as to its terms and the ability to negotiate sums by way of disgorgement of profit that were entirely non-threatening to corporate survival.

For example, 22 companies self-reported for bribery related misconduct between 2009 and 2012 but who can say how many decided to take a different course? Some may indeed question whether there has been any incentive at all truly to self report when, as SFO v Macmillan Publishers Ltd [2011] demonstrates, a civil settlement was still on the table even after the SFO had received a referral from the World Bank and the City of London Police had come knocking? Enthusiasm for the ‘wait and see’ approach will have been further fuelled by the revelation that in the year to 31 March 2012, the SFO conducted not one single raid2.

The arguments for that option would be all the stronger under what is the much tougher DPA regime. For while corporates entering into such an agreement will not, if all goes to plan, be convicted of a criminal offence, they will, as well as disgorging their profits, have to admit wrongdoing, undertake not to contest that admission in later proceedings and risk substantial punitive fines, imposed by a judiciary who are likely to be keen to emulate US-style sanctions3.

The ‘stick’ of a credible threat of prosecution must necessarily be bigger than under Richard Alderman’s regime (which, in encouraging co-operation in cases of overseas corruption, offered purely civil settlement ‘wherever possible’4), and yet questions remain as to whether the SFO represents such a threat. It has undoubtedly improved its performance since its annus horribilis of 2008 when it was the subject a scathing external report, achieved conviction rates of only 61% and suffered ignominious defeat in ‘Operation Holbein’. The flagship cartel prosecution against five corporate defendants collapsed before trial, leaving behind a bill to public funds of $25m in prosecution and $17.8m in defence costs because, as its then director admitted, the SFO ‘got the law wrong’5.

The most significant corporate scalps in the last four years have, however, been achieved not by way of convincing forensic victories but by negotiated pleas based on ‘agreements’, the notably pragmatic contents of which were rejected by the courts on a number of occasions6. Since then, the response of the SFO has been not to toughen their stance but to turn to the civil route and agreed civil recovery settlements.

Indeed, the SFO has appeared to concede a degree of impotence even in this arena, indicating to an Organisation for Economic Co-operation and Development (OECD) working group in October 2011 that they were often obliged to accept the inclusion of confidentiality clauses because, failing settlement, ‘it is likely that no further action would be taken against the company’7.

While their comments to the OECD group may have shown the SFO to have been capable of playing an excellent game of bluff in securing any agreements at all in these cases, they may have rather weakened their negotiating position going forwards.

The perception of the SFO’s ability to ‘take down’ the biggest of fish in criminal proceedings has suffered even more in the first half of 2012 with the case of Vincent Tchenguiz, who was the subject of highly publicised raids in March 2011. In February of this year the SFO was forced to issue an apology to the property tycoon for failures in which caseworkers had apparently failed to understand loan documents that flatly contradicted the allegations against Mr Tchenguiz8. An April High Court hearing saw the SFO’s conduct in the matter described by the High Court as ‘sheer incompetence’ and the case against Vincent Tchenguiz was then dropped, under Mr Green’s supervision, on 18 June.

Against that backdrop, the ‘stick’ of successful prosecution, highlighted at paragraph 121 of the consultation document, may be thought to be a less than impressive one. Is that, then, a trend that the arrival of the new director is capable of reversing? Certainly David Green appears to understand the importance of talking tough to pave the way for negotiations and has been keen to signal a hardening of attitudes immediately on his arrival in office.

He has stressed that, while he is ‘100%’ in favour of negotiated outcomes such as DPAs, they would be only one of the tools he intends to use and made clear that the rewards of a civil or other negotiated settlement may be harder won on his watch. He warns that, ‘A corporate might say, “if we come and report we might get prosecuted”. Well they might get prosecuted’9. In any case he says ‘where there is a reasonable prospect of conviction, and it’s in the public interest to prosecute, the SFO will prosecute, whether individuals or corporates…’

Mr Green starts a very long way from the position of his US counterparts, however, whose deployment of DPA’s is set against a historically tough attitude that has made settlement virtually the default approach following any allegation of corporate wrongdoing.

As well as the burden of history he also faces the obstacle of very limited resources. The judge hearing Mr Tchenguiz’s judicial review application, associated the lack of ‘clarity’ in the SFO’s case with the need for proper financing, and there is no doubt that Mr Green labours under a much-reduced budget, down 26% from the 2008-09 fiscal year to £33.9m this year and due to fall further by 2014-15 to £30.5m.

That constraint is likely to be eased only by the SFO collecting its slice of a bigger pot of confiscated assets, a tactic to which Mr Green is plainly alive, announcing the setting up of the SFO’s Proceeds of Crime Act Unit as a separate division of the SFO that will focus on securing confiscated assets and compensation for victims.

There is, however, unlikely to be any rush of further funds into the SFO any time soon and, of course, the prospect of a more stringent confiscation regime and the SFO’s new tactic of pursuing investors’ dividends in confiscation proceedings may well serve to keep those on the brink of co-operation further from his door. Only time will tell how far his plan to improve the quality of the SFO’s lawyers by means of seconded staff from the private sector will succeed.

Even with a fully functioning and well-resourced team, however, Mr Green faces a far higher legal bar than his US equivalents in successfully prosecuting corporate entities for a number of the offences to which DPAs are intended to apply. While a corporate entity will be liable for bribery offences committed by associated persons if it failed to have in place adequate procedures to prevent such conduct10, no such model of vicarious corporate liability applies to fraud and money-laundering offences. Here the prosecution still have to work with the ‘identification principle’, ie proving that a ‘controlling mind’ within the entity was personally guilty of the offence. That has never been an easy test, particularly in large organisations, and it considerably lessens the pressure on corporate defendants to consider any form of plea bargain. Such a model of liability will always rather shorten the shadow thrown by the SFO in comparison to that of the Department of Justice.

The lack of certainty presented by UK criminal procedure has also tended to discourage negotiation and compromise, as, in the UK, the prosecution simply cannot offer a defendant any guarantees as to the ultimate outcome of their co-operation.

Anyone negotiating with UK prosecutors has always had to bear firmly in mind that they have never been permitted even to advocate for a particular sentence and any agreement that they might purport to reach is likely to receive short shrift from a judge. Recent attempts by the SFO to stretch these limits and offer either an agreed package for the court’s acquiescence or recommendations as to sentence have been firmly rejected11. The availability of R vGoodyear [2005] directions, where a judge indicates the sentence they would give if a defendant were to plead guilty to agreed offences on an agreed factual basis, has alleviated the difficulty to some extent. The process still represents a considerable risk, however, to a defendant who provides additional information in the course of negotiations, which either flounder or end in an unpalatable indication from the judge. While any admissions made in the process will not themselves be admissible in any subsequent proceedings, there is nothing to prevent the prosecution using the information they have discovered to guide and inform their ongoing investigation.

It is not clear that the proposed DPA arrangements will really remove that obstacle as the consultation paper makes clear that, while a draft, unsigned, DPA would not be admissible in subsequent proceedings, ‘the prosecutor would not be precluded from relying on any evidence obtained from enquiries made as a result of the admission in an unsigned agreement’12. Pre-existing documents provided to the prosecutor would also be admissible.

Such admissions and documents are highly likely to have been shared long before the proposed agreement is placed before a judge for their approval. An agreed set of facts will have to have been prepared before the first preliminary hearing at which a judge will decide if a DPA is in principle ‘in the interests of justice’ and whether the emerging proposed terms are ‘fair reasonable adequate and proportionate’13. Any corporate will, therefore, have essentially to approach the process with the same trepidation as they might approach a current Goodyear negotiation particularly as, given the history of cases such as Innospec and BAE, it is by no means fanciful to suppose that there is a real risk of the judiciary and the SFO reaching very different views as to appropriate outcomes so that the tentatively ‘agreed’ proposals are rejected at the first hurdle.

The process will of course be much aided by the guidelines proposed in the consultation paper, which would offer corporate offenders and those who prosecute them the same assistance as is usually available to individuals in the form of detailed and authoritative sentencing guidelines around which plea negotiations can be conducted. Corporate defendants in most cases14 still lack this assistance which, together with an amended prosecutor’s code, will be essential to ensure that, while the ultimate arbiter will be the judge, the corporate, prosecutor and judiciary at least approach the process with a common understanding of the correct principles to be applied to the process and the likely outcome.

The strategic considerations for those caught up in corporate wrongdoing have certainly increased in complexity with the introduction of DPAs and the move away from the old generosity of Mr Alderman. Despite Mr Green’s tough approach, the SFO will not turn its back on the very real public interest in cheaper, faster and more certain justice for corporate entities. Moreover, while issues always arise as to the fairness of offering settlements to corporate bodies which are not available to individuals, the ‘public interest’ test, which Mr Green refers to plainly encompasses consideration of the very different consequences flowing from the prosecution of corporate bodies, the impact of which can reach far beyond the morally culpable. Negotiated outcomes and the benefits to be gained from them will, therefore, remain firmly on the table and merit serious consideration by corporates keen to avoid the possibility of protracted and risky litigation.

The stakes will be higher, however, for those considering entering into such negotiations than in recent years. There will be no possibility of confidential ‘deal making’ with the prosecution away from the glare of the criminal courts and, while the conventional reward of ‘one-third off’ the new element of a punitive fine is likely to be available to a co-operating entity, judicial comments in response to recent ‘agreements’ indicate that that is likely to represent one-third of a far bigger number than has been faced by corporate defendants to date.

The decision to self-report, co-operate or enter into negotiations with the SFO will therefore be more finely balanced than ever under the stewardship of Mr Green and the DPA regime. Those corporates who might have found themselves negotiating a settlement around the large, round table now removed from the director’s office will instead face a criminal judge, empowered to hand down substantial punitive fines and keen to ensure that the reputation of the courts is not tainted by the whiff of pragmatism.