August 22, 2014

Criminal prosecution of corporations: more likely and much harsher

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prosecute-BP-sticker2From Taylor Wessing

After much anticipation, it has been announced that deferred prosecution agreements (DPAs) will become available in the from 24 February 2014. The , inspired by the extensive and successful use of DPAs by American regulators, is hopeful that their introduction in the UK will be an effective tool for tackling serious economic crime.

DPAs provide a mechanism for settling the criminal liability of a corporate entity without prosecution in return for the corporate agreeing to certain conditions. These conditions include payment of a fine, introduction of policies and procedures to prevent similar conduct in future and supervision by an independent external monitor.

The most obvious consequence of the use of DPAs is a likely increase in the number of enforcement actions for economic crime by the SFO. DPAs make enforcement a feasible option because launching an investigation which can then be settled is cheaper than fighting it out through trial. This is an important factor for the SFO, whose ability to investigate economic crime has, historically, been compromised by a lack of resources.

Also, the evidential threshold for entering into a DPA is notably lower than it is to secure a criminal conviction in court. DPAs are permitted if there is reasonable suspicion of criminality and a reasonable belief that a continued investigation would lead to a realistic prospect of conviction. A conviction in the criminal courts, on the other hand, requires evidence showing beyond reasonable doubt that wrong-doing occurred.

Why should corporates take the use of DPAs seriously?

To correct a common and dangerous misconception, a corporate entering into a DPA is not getting off lightly. Although there is no criminal conviction, a hefty fine is likely to result. The level of fine is explained in the new Sentencing Guidelines for Fraud, Bribery and Money Laundering: Corporate Offenders, which was published on 31 January 2014. Corporates may be fined as much as 400% of the value of their gain from the criminal conduct, and this may be increased if certain aggravating factors exist, such as endemic fraudulent activity within the company. Fines will be “substantial enough to have a real economic impact which will bring home to both management and shareholders the need to operate within the law.”

Hefty fines: a small cost of business, some may say. If fines are not enough of a deterrent, then resulting reputational damage or the risk of overseas prosecution should be. The process for DPAs requires that they are finalised   in front of a judge in a public court hearing and then published. More worryingly, there are not yet clear guidelines on whether confidential commercial documents which the corporate is required to disclose for the purposes of the settlement can be accessed by overseas prosecutors. By entering a DPA in the UK, a corporate is not necessarily safe from facing prosecution abroad, if the criminality had an overseas element.

Will corporations become increasingly exposed to prosecution and DPAs in the future?

The SFO has also very recently proposed a new corporate offence that it is lobbying to be introduced: it wants the strict liability corporate offence under section 7 of the of failing to prevent bribery to be extended to cover failure by a corporate to prevent acts of any financial crime by its employees.  If implemented, this will create a new environment of risk for corporates, which will need to be addressed by adequate procedures and compliance policies for corporates.

Given the direction in which prosecutors are moving in relation to corporate crime, we also expect that the Secretary of State will, in time, give access to DPAs to the FCA also. This will open up yet further the possibility of enforcement action for a diverse number of financial crimes.

How can corporates protect themselves?

A dearth of prosecution of corporates for economic crime, especially in connection to the Bribery Act, around which there was so much hype, has led to recent apathy in the commercial world. But, the introduction of DPAs and the new Sentencing Guidelines reminds us that the SFO is serious about busting corporate crime, and this time, it has teeth.

Taylor Wessing can advise on steps to be taken to lower the risk of being involved in economic crime or to investigate suspected instances of wrong-doing by or against a company. It is important to take action now – ideally, economic crime should be avoided, but robust and effective policies should also be in place to respond quickly if it does occur to limit the fine imposed by the DPA and perhaps avoid one altogether.

For more on this story go to:

http://sites.taylor-wessing.vuturevx.com/12/862/landing-pages/criminal-prosecution-of-corporations.asp

Related story:

Anti-Corruption Report

From Taylor Wessing

On 3 February 2014, the European Commission published its EU Anti-Corruption Report.  As part of the EU’s anti-corruption package it intends to publish a report every two years on Member States’ efforts to tackle corruption.  It hopes this will stimulate political will to fight corruption and improve the coherence of anti-corruption policies and actions taken by Member States.

The UK has fared relatively well. A robust legal framework, including the stringent Bribery Act, and a generally transparent approach means that petty corruption apparently does not pose a challenge in the United Kingdom.  The UK has the lowest proportion of respondents in the EU who say that have been asked or expected to pay a bribe over the past 12 months or even know someone who has taken a bribe.  Only 15% of businesses consider corruption to be a problem in doing business in the UK (compared with the EU average of 43%).  Only 46% of respondents think corruption is widespread (compared with the EU average of 75%).

That said, and according to the Report, the UK Government’s efforts have not produced a centralised strategy.  A wide and potentially confusing variety of channels exist for reporting suspected corruption.  Do you report to the SFO, to www.actionfraud.police.uk/home or your local council?  The EU report refers to the Reigate and Banstead local council Corporate Anti-Fraud and Anti-Corruption Team as one example, but in truth, one wonders how many calls their fraud hotline has actually received.

More importantly though, the Report identifies three areas where further action is needed, none of which are surprising.  Further measures are needed to prevent foreign bribery, particularly in high risk sectors such as oil, gas and pharmaceuticals; more proactive monitoring and prosecution of potential violations in donations to political parties is required; and accountability in the governance of banks needs to be addressed.

It is, perhaps, this third area that led to David Green to announce in the same week that he is proposing an amendment to the Bribery Act.  Mr Green made known that he is in discussions with the Attorney General, the Solicitor General and the Law Commission to expand the section 7 corporate offence to include a failure by corporates to prevent acts of financial crime by its employees.  Speaking to the Telegraph newspaper, David Green said the powers would be used in “exceptional cases” and particularly where a company had profited from the criminal conduct of its staff.    Such an amendment would make it easier to prosecute corporates, like banks, in circumstances where the current controlling mind test runs into difficulties because the paperwork peters out before reaching the senior levels.  The sanction, says Mr Green, would be the financial penalty and the stigma.

Such an extension, one suspects, would be very useful in circumstances such as the current investigations into certain banks’ conduct and Libor rigging (for which the SFO is asking for an extra funding of £19m).  If Mr Green is able to broaden the scope of the Bribery Act so that it is easier to bring charges against one of the banks, he will most likely set himself up nicely for his first high profile result since announcing his intention to see more successful corporate prosecutions at the SFO.  At the same, he will have begun to address one of the European Commission’s key concerns.

Taylor Wessing can advise on steps to be taken to lower the risk of being involved in economic crime or to investigate suspected instances of wrong-doing by or against a company. We can also advise on policies and procedures to address both the existing Bribery Act offences and the anticipated additional offences being lobbied for by the SFO.

For more on this story go to:

http://sites.taylor-wessing.vuturevx.com/12/862/landing-pages/eu-anti-corruption.asp

 

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