UK: Ethical Business Conduct: An Enforcement Perspective

Last Updated: 26 March 2014
Article by Adam Greaves

At a recent seminar held at the offices of PwC, the Director of the Serious Fraud Office, David Green CB QC, made an important speech in relation to the role of the SFO.  He says its role is to investigate and to prosecute the "top most tier of serious and complex fraud and bribery".  However, he wished to emphasise that the SFO is not a regulator, nor an educator, an adviser, a confessor or an apologist.  He pointed out that the SFO is not funded for any of those activities.  Mr Green stated that the SFO is a law enforcement agency dealing with "top end, well-heeled, well-lawyered crime".  Therefore, he concludes that the SFO does not do lectures on ethics and does not issue guidance on how not to rob banks.

He then went on to set out his reasoning why a company should self-report suspected criminal misconduct to the SFO.  These were his reasons: 

  • Self-reporting does not automatically lead to criminal prosecution.  The SFO applies the full code test to material arising from a self-report.  A formal criminal investigation is likely to have been launched by the SFO to test the material and the scale of the offending.  The available evidence may well pass the evidential test.  But if the company has taken appropriate disciplinary action against those responsible, made appropriate amendments to its compliance regime, compensated victims, and genuinely and proactively cooperated with the SFO investigation, it is hard to see how it would be in the public interest to prosecute the company, as opposed to individuals.
  • A self-report at the very least significantly mitigates the chances of a corporate being prosecuted.  It opens up the possibility of a DPA or civil recovery.
  • There is a moral and reputation imperative to self-report: it is the right thing to do and demonstrates that the corporate is serious about behaving ethically.
  • If the corporate chooses to bury the misconduct rather than self-report, the risks attendant on discovery are truly unquantifiable.  And of course, there will be the long, anxious watchers of the night when complicit senior managers lay awake and fret about being found out.
  • There are so many potential channels through which corporate crime can come to light: whistle blowers; disgruntled counterparties; cheated competing companies; other CJS agencies in the United Kingdom; overseas agencies in communication with SFO; and the SFO's own developing intelligence capability (expanding, analytical, pro-active and now linked to our national intelligence agencies).
  • If criminality is buried and then discovered by any of those roots, the corporate will pay a heavy price in terms of shareholder outrage, counterparty and competitor distrust, reputational damage, regulatory action and likely prosecution of both individuals and the corporate.
  • Burying such information is likely to involve criminal offences related to money laundering under sections 327 to 329 of POCA.

So therefore Mr Green concludes that there are very strong arguments in favour of self-reporting.

Deferred Prosecution Agreements

Mr Green then proceeds to analyse what opportunities are presented by the recent arrival of DPAs in the United Kingdom to a company which is minded to self-report. 

He reminds us that prior to the existence of DPAs, the options open to the SFO were that it could prosecute or not prosecute a company, or possibly launch an action for civil recoveries.  If convicted a company could be fined or wound up.  He pointed out that this might well involve severe "collateral damage" to those who have no part in a criminality prosecuted, for example employees, shareholders or pensioners. 

DPAs provide an alternative response to some corporate criminality, a response which avoids that collateral damage.  He believes that the route to a DPA should also be cheaper, quicker and more certain for all parties. 

Although DPAs have been lifted from the US model, he points out that in the US DPAs have no statutory foundation but that they have developed through practice.  The downside is that some judges in the US feel that they are used as "rubber stamps" for deals agreed between the prosecutor and the corporate, and that the public may perceive a DPA as a "sweetheart deal" which lacks transparency. 

He considers therefore that the British model for DPAs has been adapted to the British context.  He points out the following: 

  • It is a creature of statute, explained by a published code of conduct;
  • It is available only in relation to corporates, not individuals;
  • It is designed to take account of the frustration expressed by very senior judges in the Innospec and BAE Systems hearings that they have been presented with a fait accompli as to the penalty agreed between the prosecution and defence;
  • The whole process, from preliminary hearing to application for approval to pronouncement of approval, takes place under judicial supervision;
  • The judge has to be persuaded that the DPA is in the interests of justice, reasonable, fair and proportionate;
  • The final hearing (the pronouncement of approval of the DPA, with reasons) will almost always be in open court;
  • It is by invitation only;
  • It is not a panacea;
  • Prosecution remains an option and the prosecution of individuals remains likely;
  • As experience is built up by all parties, this will generate consistency and therefore predictability around the likelihood of achieving a DPA.

Problems created by DPAs

Mr Green considers that some of the problems may include:

  • Whether the 30% guideline discount on the financial penalty (the same as that given on a guilty plea) is enough;
  • The absence of any prohibition in the Act, or Code on the supply by the prosecutor of information to third parties where permitted by law;
  • Most of all the identification principle in the English law of corporate liability.  This means that, in order to prove corporate criminal liability, the prosecutor must prove complicity in the criminality on the part of the controlling mind (board members) of the corporate.  The evidential chain tends to dry up above middle management.  The problem may be this: if prosecution of a corporate is so difficult, why should a company enter into a DPA?;
  • Mr Green has previously suggested that the situation could easily be remedied by an amendment to section 7 of the Bribery Act to create the corporate offence of a company failing to prevent acts of financial crime by its employees (on which we have blogged here).  He believes that the UK needs to tackle corporate criminal liability in order for DPAs to have maximum bite.

Reasons why a company should seek and enter into a DPA

Mr Green offers the following reasons:

  • It avoids prosecution and the stigma of a possible conviction;
  • Whilst a statement of facts must be agreed, there is no requirement for an admission of guilty;
  • It can be in private until the final declaration;
  • It speeds up the investigative process and saves on the costs and paralysis attendant on a full criminal investigation;
  • It permits of at least some influence and control by the corporate, certainly more than that presented by a full criminal investigation;
  • It provides closure and certainty;
  • It will improve the company's culture of compliance and prevention;
  • It may avoid the disqualification from tendering to EU public contracts following a conviction (although there is a discretion in the EU to disqualify an individual where there has been an act of grave professional misconduct in the course of his business or profession).

Mr Green goes on to say that what the SFO would expect from a corporate which was hoping for a DPA would be "cooperation, cooperation, and cooperation".

The Code of Practice lists, non-exhaustively, factors which will militate against prosecution and towards a DPA.  These can be found here.

Conclusion 

In conclusion, Mr Green believes that corporate self-reporting makes sense, and that DPAs, whilst not perfect, represent a very useful addition to existing arrangements, but that maximum cooperation on the part of the corporate and its lawyers is an intrinsic part of the DPA process. 

We at the BriberyLibrary concur with the Director's reasoning in favour of self-reporting.  When you consider all the risks of the alternative, in 99% of cases, it must be the right decision for the corporate.  In practice, however, it can take some time to appreciate fully the benefits of confessing one's sins.  Self-reporting certainly is not within the normal instincts of white collar crime lawyers, let alone their clients – it goes against the instincts of denying everything, and forcing the prosecution to prove its case  and, in addition, there has been much less of a culture of "plea bargaining" in the UK, than there is in the US, for example.  Everyone within the profession, lawyers, prosecutors, judges as well as clients will be watching keenly to see how the first few DPAs proceed.  There will be a learning curve for all concerned. We too await developments with interest.

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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