Deferred Prosecution Agreements: a pragmatic solution?

On 17 May 2012 the Ministry of Justice (“MoJ”) launched a consultation on plans to introduce a new means of resolving criminal cases in England and Wales: the Deferred Prosecution Agreement.

Deferred Prosecution Agreements (DPAs), together with Non-Prosecution Agreements (NPAs), have been used in the United States for years as a way of resolving criminal cases. They allow corporates to reach an agreed outcome with the authorities as a result of wrongdoing, which either the corporate has discovered itself and reported to the authorities or which the authorities have become aware of and are investigating. Depending on the nature and seriousness of the offences involved and also depending on the level of cooperation by the corporate, the authorities may agree not to prosecute the offences if the corporate accepts certain penalties and conditions. Such agreements are made with very limited judicial involvement (or no involvement at all in the case of NPAs).

The MoJ’s proposal for the introduction of DPAs in England & Wales, which initially will only be available for corporate offenders, is based on the US model, but seeks to incorporate a far greater level of judicial involvement and oversight in the process, ultimately requiring judicial blessing before a DPA can be agreed. NPAs are not proposed for England and Wales.

DPAs are intended to provide a tool to prosecutors that will encourage corporates to cooperate, by giving them meaningful credit for voluntarily disclosing their conduct and cooperating with the authorities. This should allow for swifter and more effective outcomes and for more corporate offending to be brought to light and dealt with at less cost and with the use of fewer resources than would be required if traditional routes were followed.

Under a DPA, a prosecution will be “suspended” on condition that the corporate complies with various requirements which can range from any or all of: financial penalties; compensation for victims; disgorgement of the profits of wrongdoing; and measures to prevent future reoffending or to “rehabilitate” the company by imposing reporting requirements, governance improvements or an independent monitor for an agreed period of time. The terms of the DPA would be publicly available once approved in open court. Should the conditions not be observed within the life of the DPA (likely one to three years), the prosecutor can then resuscitate proceedings.

Background to the proposals

The proposals are, in part, a pragmatic response to the difficult environment within which prosecutors of corporate economic crime have had to operate. The consultation notes the “intermittent” success of attempts to prosecute such offending. Investigations and trials of these sorts of cases are particularly long and expensive, often involving complex facts and multi-jurisdictional issues, yet the resources available to specialist prosecutors in this area are contracting. At the same time, the legal test for corporate criminal liability is a high threshold that “does not reflect the 21st century commercial organisation”, because of the need to show that the “directing mind and will” of the organisation was implicated in the crime. The consultation notes that a criminal prosecution (whether or not successful) can affect the corporate’s share price or even result in the failure of the corporate with the attendant impact on employees, customers, pensioners etc. A conviction can also have disproportionately harsh effects on the corporate’s business because they may not be able to tender for EU or US public procurement contracts.

Essentially, the MoJ considers that the “present justice system in England and Wales is inadequate for dealing effectively with criminal enforcement against commercial organisations in the field of complex and serious economic crime… If more offending commercial organisations are to be brought to justice and if offending is to be dealt with more quickly and efficiently, the SFO and other prosecuting agencies need additional tools”. Yet at the same time, prosecutors have “little to offer the commercial organisation by way of encouragement to engage, cooperate or plead. The organisation has no real incentive of its own to resolve issues with the prosecutor, particularly as there will be significant uncertainty over where the process will lead”.

A system incorporating the use of DPAs would aim to streamline the process of tackling corporate economic crime, making it cheaper and more cost-effective for both sides in the process. The proposed form of DPA would sit alongside the existing means of tackling white collar crime.

A UK-style DPA

The proposal for DPAs is a form of penalty or redress that does not amount to a criminal conviction, although it would fulfil similar purposes, namely punishment, reduction of crime (e.g. through deterrence), rehabilitation, public protection and restitution to victims. The most likely terms would include a financial penalty, requirements to change organisational governance and compensation for victims.

Importantly, the proposal is that DPAs should be available in relation to conduct that took place before they are formally introduced, including in relation to any investigations or prosecutions commenced before DPAs were available.

When would a DPA be appropriate?

While there is already guidance for prosecutors on making prosecution decisions, the consultation proposes a Code of Practice to be introduced with additional guidance on the factors prosecutors should take into account in considering whether to enter into a DPA. Those factors would include:

(i) the nature and seriousness of the offence;

(ii) level of premeditation or cover-up;

(iii) how widespread the wrongdoing was;

(iv) the seniority of the individuals involved;

(v) losses to innocent third parties;

(vi) likely impact of a prosecution on the corporate and its financial wellbeing;

(vii) parallel actions being undertaken in other jurisdictions;

(viii) remedial action taken by the organisation; and

(ix) any previous convictions or DPAs.

The Code would also cover other matters such as protection of legal privilege and prosecutors’ decisions to prosecute if a DPA is breached.

Terms of a DPA

In addition to the Code, the consultation suggests that to ensure consistency and clarity, it would be helpful for prosecutors and corporates if there were guidelines on the terms to be included in DPAs. However, the consultation stops short of setting out what those guidelines should contain and seeks views on whether it should lay down broad narrative guidelines on financial penalties and conditions or be more prescriptive with tariffs or ranges of financial penalties and other conditions on an offence-specific basis.

The consultation suggests that both the Code and guidelines should be made public to ensure transparency and public confidence in the process.

Court involvement

The DPA proposal differs most dramatically from the US model in terms of the involvement of the courts. A proposed DPA in England and Wales would be considered at a preliminary hearing held in private with both parties present. The judge would be presented with an outline of the basic agreed facts, a draft indictment or charge-sheet, the proposed conditions of the DPA and an outline of the areas still being considered. The judge would need to consider whether: (i) the proposed DPA was in the interests of justice, based on the facts presented; and (ii) the proposed terms of the DPA were “fair, reasonable and proportionate”. Assuming the judge determined that a DPA was, in principle, appropriate, the parties could continue their discussions and try to reach agreement on the final terms.

Judicial approval would also be required for the final agreement. That approval would not be subject to judicial review proceedings (although the prosecutor’s decision not to prosecute and instead to negotiate a DPA could be subject to judicial review). The hearing for this purpose would start in private, to allow the agreed DPA terms to be presented to the judge and allow discussion and resolution of any final issues. The judge would then finally determine whether the DPA was in the interests of justice and fair, reasonable and proportionate. If so, it would be approved in open court to ensure openness and transparency. If the DPA was not approved, the prosecutor would be given a period of time to decide whether to bring a prosecution.

Structure

A DPA would contain an agreed statement of facts signed by the company’s representatives and which, should there be proceedings at a later date for any reason, could not be contested. A DPA would also be stated to last for a specific period, likely to be between one to three years. Both the DPA and statement of facts, together with any information provided by the corporate, would be admissible in subsequent civil or criminal proceedings against the corporate. In criminal proceedings against individuals, the information provided by the corporate could be used by the prosecution, although admissions made by the corporate could not.

The financial penalty element of the DPA would be amenable to a maximum reduction of a third compared with the penalty that would have been imposed had the offence been prosecuted. This reduction, together with the avoidance of a criminal conviction, is expected to provide sufficient incentive for corporates to cooperate while still ensuring the penalty properly reflects the seriousness of the crime. The discount on the financial penalty would not apply to any other financial terms of the DPA, such as disgorgement of profits from the wrongdoing and/or compensation to victims.

Other than the financial terms, a DPA may also include in appropriate cases:

(i) an obligation to make available to the prosecutor all relevant non-privileged information and material, including access to witnesses;

(ii) requirements to remove specific individuals implicated in the wrongdoing or to pull out of the relevant market where the wrongdoing has taken place;

(iii) conditions to create adequate anti-corruption or fraud policies and procedures where it has been agreed that these were not in place or were not being observed; and

(iv) a requirement to provide periodic reports or to accept the appointment of an independent monitor to review the organisation’s policies and procedures over time.

Breach

If the corporate complied with the terms of the DPA, then on the expiry of the agreement, the prosecutor would inform the court of the successful completion of the DPA and offer no evidence on the charges that were adjourned, so that the prosecution would cease. If, on the other hand, the DPA was not complied with, then the possible options may include: reconsideration and amendment of the terms and conditions; formal proceedings for breach of the agreement; or resuscitation of the prosecution. The proposal recognises that a company’s circumstances can change over time and that this could impact on whether it would be able to comply with conditions set at an earlier date. A mechanism to deal with those eventualities is envisaged but its scope and process, for example whether the court should be involved, are open for consultation.

Formal breach proceedings could result in a (further) financial penalty, additional conditions, extension or termination of the DPA, followed by prosecution of the underlying offences that were to be settled by the DPA. If the DPA were terminated, consideration would need to be given to whether sums paid under it should be repaid for any reason. However, if the corporate were later prosecuted and acquitted of the offences that were the subject of the DPA, it would not automatically be entitled to recover any of the money it had paid under the DPA.

Outlook

The impact assessment accompanying the consultation envisages DPAs being in place by early 2014 or 2015. Currently over a third of the SFO’s cases are related to corporates; therefore, in theory at least, a third of the SFO’s cases could be eligible for DPAs. The assessment also projects that taking the route of a DPA as opposed to a contested trial could cut the time to resolve a case from 6.2 years to 2.8 years, with DPAs estimated to cost less than a quarter of the cost of a contested trial. On this basis, it is estimated that the SFO would enjoy cost-savings of £0.8 million to £1.2 million annually from the take-up of DPAs.

In addition, DPAs are expected to contribute to a “significant increase” in penalty income for the State. However, it is not expected that these will increase to the levels seen in the US, due to differences in the legal systems and the strength and resources of the US prosecutors, which enable the negotiation of higher penalties than could be expected here. However, at the upper limit, the assessment predicts that if the penalties imposed under English DPAs were at approximately 50% of the levels seen in the US, an average DPA would be £30m for the financial penalty alone.

Comment

The proposals for a DPA remedy signal a more pragmatic approach to prosecution of economic crime in the UK, in keeping with the recent more innovative efforts of the SFO to achieve better and quicker results through engagement with business and incentivising cooperation. Those efforts have had mixed outcomes, but if the Government’s stated intention to treat economic crime as seriously as other crimes is to be achievable at a time when the resources of those tasked with investigating and prosecuting those crimes are being stretched, an approach that reflects this reality is needed. The key driver is clearly the need to save time and cost and DPAs may offer an acceptable solution if they can work in a manner that gives the public confidence in their outcomes.

However, DPAs would be far from a panacea and at best may mask (for a little longer) the more fundamental problems with the UK criminal justice system in tackling serious and complex crime. One of the key justifications for DPAs is the complexity and inadequacy of the existing laws on corporate criminal liability. Yet the proposals do not consider the anticipated positive impact of the strict liability corporate offence under the Bribery Act for failing to prevent bribery (section 7). Instead, the impact assessment speculates that the CPS may see a number of cases arising under the section 7 offence that will be suitable for DPAs. This suggestion is curious, given that the section 7 offence exists to make it much easier to prosecute corporates for the actions of those associated with it, such that a DPA may be harder to justify as being in the interests of justice in this context.

The proposals also do not refer to the review into corporate criminal liability that has been ongoing since before the Bribery Act was introduced and which has put on hold any proposals to amend this concept until a more thorough review takes place in the future. If the MoJ is satisfied that the law on corporate liability is inadequate, one may wonder why they have not brought forward proposals to change it, rather than looking to deal with the problem by simply offering an alternative remedy. Given the widespread criticism of the “directing mind and will” test, most recently in the OECD’s Phase III report on the UK’s implementation of the OECD Convention on Combating Bribery of Foreign Public Officials, simplification of the corporate liability test in the near future may further strengthen the prosecutor’s position.

Another important issue identified in the proposals is the lack of incentives under the current law for corporates to self-report wrongdoing to the authorities. Yet the proposals designed to provide this incentive (assuming they are not improved following the consultation) may receive a somewhat lukewarm response in practice. Notwithstanding the obvious benefits of avoiding a conviction, given the tariff discounts already available to those who admit culpability at an early stage of an investigation, the prospect of gaining up to a third off one element of the financial remedy that might otherwise be imposed following a conviction may not be incentive enough – particularly where the prospects of the authorities discovering the wrongdoing themselves may appear low (as noted in the proposals).

The consultation raises important questions about whether and, if so, how DPAs should be introduced into law in England and Wales in relation to corporate economic crime. By responding to the consultation questions by the 9 August 2012 deadline, those interested in how the proposals are taken forward have a real opportunity to help shape a potentially significant new development in the criminal law. We will be submitting our own response to the consultation as a firm. If you have comments on the proposals which you would like us to include as part of our response to the consultation, please contact Omar Qureshi or Lisa Fox (contact details appear below).

Please click here for the consultation.