Ministry of Justice Consultation on Deferred Prosecution Agreements: the “third way” to tackle economic crime?

On 17 May 2012, the UK Ministry of Justice (MoJ) published a consultation paper on the introduction of US style Deferred Prosecution Agreements (DPAs), a new enforcement tool to deal with economic crime committed by commercial organisations. DPAs, which offer corporate offenders the chance to defer criminal charges subject to their compliance with financial penalties and other conditions agreed with a prosecuting authority, are intended to broaden the range of tools available to prosecutors when dealing with economic crimes (namely fraud, offences under the Bribery Act 2010 and money laundering offences). Solicitor General Edward Garnier QC MP has suggested that they would be a “helpful addition to criminal justice machinery”, providing certainty for the corporate, compensation for victims and a deterrent effect overall. Subject to the seriousness of a wrongdoing, the DPA process may enable commercial entities to avoid criminal prosecution entirely, allowing companies to continue operating without the collateral damage that a prosecution would likely entail.

In this briefing we review the detail of the consultation paper and consider the application of DPAs in the UK and the potential risks that they may pose to corporates.

Where a suspected economic crime has been committed, there are currently two main options available to prosecutors in the UK: (i) an investigation into the alleged offence which may ultimately result in reporting to the relevant authorities and/or civil recovery under Part V of the Proceeds of Crime Act 2002 (POCA) or (ii) where there is stronger evidence to suggest that an offence has been committed, criminal prosecution. A key MoJ objective is to give prosecutors a middle ground option in order to avoid protracted investigations or trials, particularly for sophisticated and multi-jurisdictional economic crimes. High profile examples include the Serious Fraud Office (SFO) investigation into BAE Systems, spanning from 2003 to 2010, and ongoing investigations into Wal-Mart de Mexico, whose executives are accused of concealing approximately $24 million worth of bribes to officials since 2005 to speed the construction of new stores.

It is anticipated that US-style DPAs will assist the justice system in England and Wales in tackling more instances of white collar and economic crime. DPAs will enable prosecuting authorities and defendant commercial organisations to more easily assess instances of economic crime and enter into arrangements tailored specifically to their needs.

It may take some time before DPAs are smoothly integrated into the pre-existing binary enforcement system in the UK. The coalition government’s focus on fighting white collar crime, evidenced by the Bribery Act 2010, the self reporting initiative (encouraging companies to self report bribery offences) launched to coincide with the Bribery Act 2010 coming into force in July 2011 and the planned implementation of the National Crime Agency as a crime fighting unit in 2013, is admirable. However, the limited resources and drastically reduced budget of leading investigatory bodies such as the SFO demonstrate that greater change is needed in order to ensure economic crime is recognised as a serious issue.

The use of DPAs alongside civil and criminal enforcement methods is intended to reinvigorate the UK approach to the investigation of economic crimes. The US system will be tailored to suit UK needs:

• A proactive judiciary: The perceived lack of judicial oversight in the US DPA process is considered to be untenable in the UK; in order to ensure DPAs sit comfortably within the constitutional and legal traditions of the courts of England and Wales, the UK judiciary will take a hands-on approach, navigating prosecutors and commercial organisations through the process:
  1. Preliminary private hearing to assess suitability of DPA: The judge will consider whether a DPA is “in the interests of justice” for a given offence and if so, the merits of the process will be assessed during a private hearing. He will weigh up, amongst other factors, the nature and seriousness of the offence committed, whether it is continuing, historic relevant convictions and the potential impact alternative enforcement options could have on the offending company. Judicial involvement is to be fair, reasonable and proportionate.
  2. Open hearing for approval of DPA: The form and content of a UK DPA (to be approved by a judge in open court) will reflect the US example, including a statement of agreed facts, time limits for compliance with conditions, the duration of the agreement, disgorgement of profits for wrongdoing and methods to deter future offending.
  3. Ongoing monitoring: The parties’ compliance with DPA terms will be monitored. Monitoring will be applied on a case by case basis ranging from “light touch” to “intensive” monitoring. It will be at the judge’s discretion to terminate a DPA for non-compliance or breach.
  4. Acknowledgment of compliance: The judiciary will provide the parties with confirmation that the DPA has been satisfied, dismiss all offences and withdraw the agreement. The average US DPA lasts for a period of 2-3 years. Where a company has failed to fulfil a DPA, the courts will continue to pursue the deferred offences.
• Transparency and consistency: Measures will be taken to ensure that a fair and open process is followed: judicial intervention in the early stages of negotiation will ensure that the drafting of DPAs and financial penalties agreed are proportionate to the wrongdoing committed. The publication of DPA details on the SFO or Revenue and Customs Prosecution Office (RCPO) websites, subject to other ongoing prosecutions, will also encourage companies to disclose further suspicions; failure to do so may be used against them in civil proceedings.

It is important to recognise that the use of DPAs in the US has uncovered certain issues and risks that may also emerge in the UK:

• Waiver of privilege: Depending on the offence committed, commercial entities may find themselves waiving legal privilege or agreeing to more prosecutor friendly DPA terms in order to demonstrate cooperation with an investigation. The relative bargaining strength of the parties prior to entering into an agreement will be important to consider.
• Avoiding criminal prosecution: As DPAs are to be used as an alternative to criminal prosecution, organisations may be able to avoid criminal culpability entirely, allowing them to pay a large fine to avoid a criminal investigation with no further repercussions. The Solicitor General has confirmed that individual directors will not be immune from personal liability for committing an offence, however the MoJ has not ruled out potentially extending the DPA regime to offending individuals in the future.
• Significant financial penalties: In the past, US financial penalties under US DPAs have been considerable: in August 2005, for example, KPMG LLP agreed to pay $456 million under a DPA for criminal tax fraud. Although an exceptional example, fines continue to be heavy: in June 2012, accounting firm BDO US LLP, agreed to pay $34.4 million to the Internal Revenue Service (IRS) in civil penalties and $15.6 million to the US government under a DPA for failing to register tax shelters between 1997-2003, generating $6.5 billion in tax losses and assisting the evasion of approximately $1.3 million in income taxes. It is hoped that DPAs will minimise the collateral damage associated with a criminal prosecution, but the financial dent of a DPA may be difficult for a corporate to recover from.
• Potential for manipulation: Commercial organisations will be encouraged to self-report and admit certain facts in the content of a DPA. There is a residual concern however, that they may choose not to divulge all known issues, masking more serious criminal conduct which could go undetected. Judicial vigilance will be imperative.
• Corporate monitorships: The US system has encouraged the appointment of independent corporate monitors whose role is to ensure the corporate’s compliance with the DPA. The Solicitor General has suggested that monitors would play a similar role in the UK. During a lecture series on the utility of DPAs in March 2012, Amy Jeffress of the Department of Justice Attaché US Embassy stated that US judges have at times viewed monitors negatively for capitalising on the DPA process. The Solicitor General has made it clear that he opposes any new “satellite industries” emerging out of any DPA system in the UK - any such monitoring “industry” would indeed need to be contained so that only those professionals fully qualified to undertake the role are appointed.

The consultation is to remain open until 9 August 2012 and it is expected that a formal response from the MoJ will be published on 31 October 2012. It remains to be seen whether there will be a positive reaction to DPAs and, if implemented, whether they will ensure that a higher proportion of economic crime is addressed. At present there remain a number of unanswered issues: the shape that the agreements will take and how they will fit within the English legal system is unclear and we understand that the Director of Public Prosecutions (DPP) and the new Director of the SFO David Green QC are to issue a Code of Practice for prosecutors, procedural rules and further operational guidance to assist parties entering into DPAs although details are not yet available. Further, the global reach of DPAs and the MoJ’s approach to creating DPA international cooperation is yet to be established. Although the paper convincingly argues that DPAs will narrow the enforcement gap in the UK, it is worth bearing in mind that this new regime can only go so far - it cannot provide a definitive solution to the ever evolving and widespread problem of economic crime.