The Federal Government's budget announcements in May this year included notice that funding to the corporate regulator, the Australian Securities and Investments Commission (ASIC), will be reduced by $120 million over the next five years1.The Australian Federal Police (AFP) faces similar losses in funding2. The Federal Government's announcements coincided with the recent introduction of deferred prosecution agreements (DPAs) in the United Kingdom.
The Crime and Courts Act 2013 gives UK prosecuting authorities the power to enter into DPAs. Originally used in the United States, a DPA is an agreement between a prosecutor and a company accused of economic offences, such as fraud or foreign bribery, which allows the company to avoid a criminal conviction in return for compliance with certain conditions. DPAs pose a number of apparent benefits for companies and the public sphere in which those companies operate, including the financial benefits of avoiding drawn-out investigations and prosecutions.
It is important that Australian companies understand the implications and risks of entering into DPA negotiations. It may be that continued cuts to funding of prosecuting authorities may ultimately lead to DPAs being part of the Australian regulatory landscape.
The DPA process
Under the UK regime, a prosecutor has discretion to invite a company to enter into DPA negotiations. Companies have no right to be invited to enter into DPA negotiations and, equally, no obligation to accept if an offer is made.
Before the prosecutor invites a company to enter into DPA negotiations, it must be satisfied that:
- There is a reasonable suspicion that the company has committed an offence and there are reasonable grounds for the belief that an investigation would establish a realistic prospect of conviction; and
- It is in the public interest to enter into a DPA with the company instead of a prosecution.
The second stage of this test involves the balancing of several factors, including:
- Seriousness of offence: The more serious the offence, the more likely it is that prosecution of the company will be in the public interest. 'Seriousness' is judged on, among other things, the value of any gain obtained by the company, the risk of harm to the public,stakeholders and to the integrity of the market itself.
- History of similar conduct: A prosecution will be preferred if the company has been involved in similar offending in the past.
- Business practices and compliance: A prosecution will be preferred if the alleged conduct is part of established business practices of the company and the company did not have effective corporate compliance processes in place.
- Self reporting and cooperation: The prosecutor will consider whether the company self reported its conduct and, if so, how early and comprehensively it did so. An invitation to enter into DPA negotiations is more likely to be extended where the company has cooperated with authorities, including producing witnesses and disclosing books and documents.
DPA negotiations may result in a company agreeing to some or all of the following terms:
- A financial order, which may include compensating victims, financial penalties, charity donations or recovery of profits.
- Cooperating with any investigations relating to the alleged conduct.
- Prohibitions on undertaking certain future activities.
- Implementing financial reporting requirements and corporate compliance programs.
If a DPA which has been entered into is subsequently breached by the company, the prosecutor can then apply to the court for the prosecution against the company to be reinstated.
Benefits of DPAs
DPAs appear to carry several benefits for the corporate sector. In particular:
- A regulator would have an alternative way of holding an offending company to account, where financial restrictions may otherwise have prevented the regulator from conducting an investigation and prosecution.
- Entering into a DPA would give a company more certainty than if it were involved in an investigation and subsequent proceedings. The company would have some negotiating power with respect to penalties, and could achieve a resolution more quickly. This would allow the company to more readily move on from past behaviours.
- Entering into a DPA may also reduce a company's legal costs and risk of adverse publicity associated with criminal proceedings.
Risks to Australian companies
From an Australian corporate viewpoint, the biggest issue with the UK-style DPA is that it may not provide adequate motivation for companies to self report. In particular:
- There is no guarantee that a company which self reports its conduct will be invited to enter into a DPA. Self reporting is one of several factors taken into account by the prosecutor.
- The prosecutor is entitled to use any information disclosed to it by a company in any prosecution, even if that information is disclosed by the company with a view to entering into a DPA.
- Even if a DPA is offered, the terms proposed by the prosecutor may not include reduced penalties.
A company which does enter in a DPA may suffer reputational harm, by reason of the requirement that the DPA (a publically available document) must contain a 'statement of facts' which sets out the particulars of the alleged offence and any gain obtained by the company. The statement of facts must be admitted by the company. This may cause more damage to the reputation of the company than in circumstances where the company proceeded with defending a prosecution and was ultimately cleared of wrongdoing. This will be one of the factors to be considered by clients if and when DPAs become relevant.
A diminishing pool of resources available to Australian prosecuting authorities may be the impetus for the introduction of DPAs in Australia. On their face, DPAs provide a number of benefits for the corporate sector. However, Australian companies must be alive to the risks of entering into DPA negotiations with ASIC or the AFP, should an invitation ever be extended.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.