UK: Deferred Prosecution Agreements – What They Could Mean For Ds&Os And Their Insurers

Last Updated: 14 March 2014
Article by James Roberts

In the USA, deferred prosecution agreements or DPAs have been part of prosecutors' arsenal to tackle corporate economic crime for over two decades, whereas law enforcement agencies in the UK felt that their toolkit was lacking.

In response, the UK Government enacted the Crime and Courts Act 2013 and, with it, paved the way for DPAs to be used in England and Wales. In advance of DPAs 'going live' on 24 February 2014, the Serious Fraud Office and Crown Prosecution Service published the Code of Practice on 14 February 2014.

What is a DPA?

Looking firstly at the mechanics, a DPA is an agreement between the prosecutor and a corporate whom the prosecutor is considering prosecuting for various common law and statutory criminal offences, as listed in the Crime and Courts Act 2013. Offences include fraud, bribery and certain violations of the Financial Services and Markets Act 2000, such as contravening the prohibition on carrying on regulated activity unless authorised or exempt (s.23) and misleading the FCA (s.398), to name but a few.

Only certain prosecutors have the power to enter into DPAs, including the Director of the SFO, Director for Public Prosecutions and any other prosecutor designated by Order of the Secretary of State. The other party to the DPA can only be a body corporate, partnership or unincorporated association; not an individual.

The prosecutor must be satisfied that both an evidential test and a public interest test are met in order to determine that it is appropriate to enter into a DPA, taking into account the various factors listed in the Code of Practice.

Under the DPA, the corporate agrees to comply with the requirements imposed on it and the prosecutor agrees that, upon approval of the DPA by the court, proceedings will be instituted for the alleged offence but are immediately and automatically suspended.

The DPA must contain a "statement of facts" relating to the alleged offences which gives particulars relating to each offence and includes details of any financial gain or loss. The Crime and Courts Act 2013 notes that the statement of facts may include admissions made, but the Code of Practice adds that there is no requirement for formal admissions of guilt in respect of the offences charged, though it will be necessary for the corporate to admit the contents and meaning of key documents referred to in the statement of facts. In the event that the corporate is prosecuted (because the DPA is terminated for whatever reason), the statement of facts would be admissible in those proceedings.

It is also important to note that an invitation from a prosecutor to enter into negotiations for a DPA does not guarantee that a DPA will be agreed and there are circumstances in which information obtained by the prosecutor during the negotiation stage can be used in subsequent proceedings.

Depending on the circumstances of the case, the requirements that a DPA may impose on the corporate include:

  • To pay to the prosecutor a financial penalty
  • To compensate victims of the alleged offence
  • To donate money to a charity or other third party
  • To disgorge any profits made by the corporate from the alleged offence
  • To implement a compliance programme or make changes to an existing compliance programme relating to the corporate's policies or to the training of its employees or both
  • To co-operate in any investigation related to the alleged offence
  • To pay any reasonable costs of the prosecutor in relation to the alleged offence or the DPA

This is in contrast to the previous criminal sentencing regime where remedies against corporates found guilty of criminal offences are limited to fines and orders to wind up.

In terms of assessing the appropriate level of penalty to be applied, the Sentencing Council has recently published Guidelines intended to assist as a point of reference when financial penalty levels within DPAs are being considered and negotiated. The Guidelines do not come into force until 1 October 2014, in order to coincide with the introduction of new guidelines for individuals convicted of an offence of fraud, bribery or money laundering.

Where the prosecutor considers that the corporate has breached the DPA, it must apply to the Crown Court for a determination, on the balance of probabilities, as to whether there has been a failure to comply. If the Court determines there has been a breach, it can either permit the prosecutor and corporate to agree the remedy, or terminate the DPA (in which case the prosecutor can apply for the suspension of the indictment to be lifted).

What DPAs could mean for D&O insurers

As noted above, a DPA is entered into between the prosecutor and the corporate. Directors and officers cannot be parties to it, meaning there is no reason why separate proceedings could not be brought against individual Ds&Os if breaches or offences are identified through the DPA process. This is particularly a concern where the terms of the DPA require the corporate to 'co-operate in any investigation related to the alleged offence'. A company cannot answer the prosecutor's questions, meaning that this job will fall to the Ds&Os, which may trigger a notification to the D&O insurers.

As noted above, a key component of a DPA will be the "statement of facts", which is agreed as between the prosecutor and the corporate, and "may include admissions by" the defendant. Ds&Os will need to take care here that the content of the statement of facts could not be construed as an admission of liability by them individually, thereby falling foul of the conduct exclusion should cover otherwise be available.

Furthermore, in today's regime where self-reporting and cooperation with the authorities are encouraged, it seems likely that DPAs could become a natural follow on from companies' internal investigations (during which Ds&Os will have been interviewed) that resulted in the company self-reporting any issues identified.

There is consequently a risk that DPAs could drive a wedge between the corporate and Ds&Os, particularly where it serves the corporate's interests to implicate its Ds&Os in order to secure a lighter penalty for itself, and trigger satellite litigation against the Ds&Os.

A further consideration for companies and their Ds&Os is the transparent nature of the DPA, which could generate media interest about those concerned, leading to a need for assistance from public relations consultants, cover for which is often a feature in wordings.

Although public policy already dictates that corporates cannot be indemnified by their insurance for many criminal fines and penalties, D&O wordings may require closer examination to assess how the scope of cover might be affected by the arrival of DPAs, particularly around the picking up of pre-investigation and investigation costs as well as public relations expenses and how broadly the conduct exclusion is drafted.

While there will inevitably be a transition period while the various stakeholders get to grips with DPAs, it seems unlikely that we will have to wait too long before the first DPA is agreed. With that in mind, there seems to be no time like the present to review how existing D&O wordings might react to these developments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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James Roberts
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