UK: Self-reporting to the SFO: Is The Confiscation Regime A Major Stumbling Block?

Article by Neil Gerrard, Head of Litigation & Regulatory Group

Companies entering uncharted waters

In a well publicised shift of emphasis in the investigation and prosecution of serious fraud and corruption the Director of the UK's Serious Fraud Office ("SFO"), Richard Alderman, is trying to encourage companies to engage with his organisation and self-report past wrongdoings. This is new territory for the SFO, the judiciary, companies and their advisers

The SFO recently issued guidelines on self-reporting confirming that the SFO is moving more towards a US-style system of self-reporting and plea negotiation. However, this is not about plea bargaining in the US sense and the scope for incentives is narrow. The SFO says that when companies self-report it will use civil penalties "wherever possible" instead of criminal sanctions but gives no guarantees or further guidance. In this uncertain environment, companies should not rush headlong into self-reporting before carefully considering what is to be gained or lost by either self-reporting or waiting for the SFO to come knocking.

Self-reporting is all well and good for those companies who manage to negotiate a Civil Recovery Order, as in the recent Balfour Beatty and AMEC cases. With this type of outcome the advantage is more transparent: the settlement is largely in the hands of the SFO, the corporate defendant and its advisers, with no conviction and no complex confiscation proceedings to contend with.

But it is the cases where the SFO decides that a civil settlement is not a suitable outcome and wants a company to plead guilty to criminal offences where the most serious consequences arise. The corruption case involving Mabey & Johnson has hit the headlines recently following its guilty pleas and sentencing at Southwark Crown Court. The SFO very much sees this case as the shape of things to come with Alderman, stating that:

"This is a landmark outcome. The first conviction in this country of a company for overseas corruption and for breaking the UN Iraq sanctions and, satisfyingly, achieved quickly. The offences are serious ones but the company has played its part positively by recognising the unacceptability of those past business practices and by coming forward to report them and engage constructively with the SFO. I urge other companies who might see some parallels for them, to come and talk to us and have the matter dealt with quickly and fairly".

In this case the judge approved the plea agreement in both quantum and terms and the penalties imposed on the company totalled £6.6 million, a figure which included £1.1 million in confiscation.

However, the Mabey & Johnson case does not set a precedent for future cases, especially in relation to confiscation, which is the issue giving most cause for concern to those who are advising companies on self-reporting issues. Confiscation proceedings against individuals are now commonplace and the issues have been thoroughly debated in numerous appeal cases but with corporate defendants we are entering uncharted waters.

Mabey & Johnson was perhaps fortunate that because of the date of the earliest offence charged (1993), its confiscation was determined under the Criminal Justice Act 1988 (CJA). This is significant because the CJA regime allows a more favourable outcome in respect of confiscation than subsequent confiscation regimes. Under the CJA regime a Crown Court judge can only make a confiscation order if the prosecution lodges a formal request. But once the formal request has been made the judge has discretion to a) decide whether or not to make the order and b) decide the amount payable - "as he sees fit".

In the Mabey & Johnson case this made a difference to the outcome in two respects. Firstly, knowing that the judge could not proceed to confiscation on his own account, the prosecution was able to ask him to agree the sum available for the fine and confiscation (£4.6 million as per the plea agreement) before it formally asked for the confiscation order. Secondly, having decided that the sum available was adequate, the judge was able to decide what sum was reasonable in all the circumstances and how much to allocate to the fine (£3.5 million) and the confiscation order (£1.1 million).

However, there is a dark cloud looming for future cases - namely the confiscation regimes under the Proceeds of Crime Acts 1995 and 2002. For offences committed after November 1995 the confiscation regime is far more draconian:

• There is a mandatory obligation on the court to conduct a confiscation enquiry if the prosecutor asks for a confiscation order.
  
• But even if the prosecutor decides not to ask for a confiscation order, the court has a discretion to conduct an enquiry in any event.
  
• The court has no discretion in determining the amount to be confiscated, the calculation of "benefit" from "criminal conduct" being determined by statute.
  
• There are so-called "lifestyle provisions" which may put any property held or obtained in the six years prior to proceedings at risk of confiscation.
  

Given these restrictions, a judge could not simply ratify the plea agreement and the agreed sums as was done in the Mabey & Johnson case. To put this in perspective, under the CJA regime Mabey & Johnson paid £1.1 million in confiscation but under the Proceeds of Crime Acts, the sum at risk of confiscation would have been as high as £60 million. This sum represents the "benefit" or value of the contracts, rather than any profit obtained from the offences committed. Clearly this is a very different proposition and potentially a huge threat to the ongoing viability of any company caught by the later regimes.

There has been much discussion about the merits of self-reporting, plea negotiations and the incentives for engaging with the SFO. There has been recognition that companies may be unwilling to come forward because of issues such as the EU procurement rules by both the SFO and the Joint Committee scrutinising the draft Bribery Bill. These rules (given effect in the UK by the Public Contracts Regulations 2006) contain a mandatory exclusion of companies where the company, its current directors or other decision makers have been convicted of participation in a criminal organisation, corruption, bribery and fraud. However, there has been little recognition of the fact that the effect of the confiscation regime may present an even bigger barrier to self-reporting. Whilst the procurement ban is potentially disastrous to those companies which rely on government contracts, they do not affect every company's business, whereas the draconian confiscation regime has the potential to bring financial ruin to every company which is convicted. A reference to the confiscation regime in the Joint Committee's report on the draft Bribery Bill acknowledges that the consequences can be severe but only recommends that the Government should "Ensure that that civil powers of recovery and confiscation will operate in a way that is proportionate and reasonable".

Can a confiscation order be limited by the plea agreement?

The Attorney General, Baroness Scotland's guidance "Plea Discussions in Cases of Serious or Complex Fraud" (the Guidelines), which took effect in May 2009 gives valuable guidance and assistance but is largely silent as to how confiscation is to be handled. However, it is made clear that confiscation cannot be disregarded in plea negotiation cases.

Under the Proceeds of Crime Acts a confiscation enquiry cannot be avoided and will involve a thorough forensic assessment of the benefit obtained from the offences committed by a company and its "realisable assets" - the means at its disposal to pay the order. And once confiscation proceedings are set in motion there is no discretion to make an order according to what is fair and reasonable in all the circumstances. The courts have a clear duty to deprive a convicted defendant of the benefits of his criminal behaviour and the effect can be extremely harsh:

Would it be possible to enter into a plea agreement with the SFO that limits confiscation proceedings, or agrees a sum which is proportionate and reasonable? There may be some room for manoeuvre on the basis of the charges laid, the agreed facts and any financial statements put before the court. This would give some scope for limiting the benefit obtained from the criminal conduct, the value of the benefit obtained, the proportionate sum which is recoverable and the availability of assets to satisfy any order. However, the mere fact that the quantum of benefit and realisable assets is agreed between the SFO and a potential corporate defendant will not and cannot, in itself, bind a Crown Court judge in confiscation proceedings. The judge is not only permitted but positively obliged to investigate any agreement between the prosecution and defence as to the appropriate quantum of any confiscation order, and to reject it if it is not in accordance with the statutory scheme.

A dilemma for the judiciary and companies

If the practice of self-reporting is to be supported and encouraged the courts face the challenge of finding a pragmatic approach to the issue of confiscation. Under the Proceeds of Crime Acts regimes the matter of confiscation appears to be outside the scope or control of the plea agreement and it is far from clear how judges will deal with this issue in order to achieve an effect which is proportionate and reasonable.

This presents a number of troublesome issues for companies and their advisers to contend with when deciding whether to self-report in the UK including:

• Whether to report at all. There is no obligation to self-report and little incentive, other than the possibility of mitigating costs and the overall financial penalty by entering into a civil settlement or plea agreement. The SFO has indicated that it is stepping up its actions against corporate defendants but historically has prosecuted very few.
  
• Whether the outcome is likely to be a civil settlement or a prosecution. There is currently little guidance or case law on what to expect although in relation to overseas corruption cases the SFO has said, "the benefit to the corporate will be the prospect (in appropriate cases) of a civil rather than a criminal outcome.." But if negotiations fail to achieve a civil settlement, the company could find itself subjected to criminal charges and confiscation in any event.
  
• If the company is to plead guilty to criminal charges, how can they negotiate a plea agreement which will not bring the company to its knees financially? The position is fraught with uncertainty given the effect of mandatory EU procurement bans and the issues surrounding the confiscation regime.
  

While so much uncertainty exists, there is enormous potential for damage to the credibility of the SFO. It wants companies to self-report and cooperate as it simply does not have the resources to investigate every case. The inability of the Proceeds of Crime Acts regimes to permit judicial discretion or sanctioning of an agreement between the parties means that the SFO may well be unable to undertake to control the confiscation process in a manner which will guarantee the survival of a corporate defendant or minimise the risk of serious economic harm. Some degree of control can be exercised by the nature of the charges laid, the pleas tendered and an agreed basis of plea. But the final decision rests with the judge and unless legislation, case law and guideline strictures are effectively ignored, that degree of control may well be inadequate. Companies do not want to spend months analysing company accounts, putting their house in order and negotiating a plea agreement, only to find that the judge does not, or cannot, accept the terms of the agreement and joint submissions on sentence and confiscation.

The effects of the confiscation regime for companies will develop over time but companies need some degree of certainty now, either through guidance or a change in the confiscation legislation. Corporate responsibility and self-cleansing are a very much in the media spotlight and a subject for discussion at board level in many companies. However, the uncertainty surrounding the potential outcome may prove a positive disincentive to self-reporting. In tough economic times, many companies would sink without a trace if they were penalised by the full force of the current regime. It cannot be in the public interest for a company which has not only cooperated, but has been seen to cooperate with the SFO, to be put out of business with the attendant loss of jobs and investor funds.

Yet there is no escaping the fact that Parliament intended the legislation to have a draconian effect and this has been repeatedly approved and implemented by the courts. Individuals have been deprived of sums well in excess of any profit actually received from their criminal enterprise which means that they have lost everything. Some might ague that there is no reason in law or logic why an individual should receive different treatment to a company. But, on the other hand, surely it is in the wider public interest to clean up British business by encouraging companies to wipe the slate clean and pay a fair and equitable financial penalty. If we are to see more corporate self-reporting and effective plea negotiations in the UK, the confiscation regime must be reviewed sooner rather than later, otherwise a window of golden opportunity may be lost.

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.