Bribery Library Blog - Commentary on the UK Bribery Act and Its Impact on International Business

A Parliamentary Bill which, amongst other things, makes provision to introduce Deferred Prosecution Agreements into the UK received the Royal Assent last week.

The subject of Deferred Prosecution Agreements (“DPAs”) is covered in section 45 and Schedule 17 of the Crime and Courts Act 2013.

No date has been set for the coming into force of these provisions but they will have retrospective effect with regard to conduct occurring before the commencement of Schedule 17.

The salient provisions contained in the Schedule are as follows:

Characteristics of a DPA

A DPA is defined as ‘an agreement between a designated prosecutor and a person (“P”) whom the prosecutor is considering prosecuting for an offence…..’ whereby ‘P agrees to comply with the requirements imposed on P by the agreement…..’

Effect of DPA on instituted court proceedings

As soon as proceedings for an alleged offence are instituted by a prosecutor, they are automatically suspended on application to the Crown Court by the prosecutor and following approval of the DPA by the court.

‘Instituted proceedings’ are those which have been instituted by the prosecutor in the Crown Court by preferring a bill of indictment charging P with the alleged offence.

Offences to which this applies are specified in Part 2 of Schedule 17.

Persons who may enter into a DPA

P may be a body corporate, a partnership or an unincorporated association but may not be an individual.

Content of a DPA

A DPA must contain a statement of facts relating to the alleged offence and must specify a date upon which it ceases to have effect.

The requirements that a DPA may impose on P include, but are not limited to, requirements to pay a financial penalty to the prosecutor, to compensate victims, to donate money to a charity, to disgorge any profits made, to implement or make changes to a compliance programme, to co-operate in any investigation and to pay costs to the prosecutor.

Any money received by the prosecutor in relation to a financial penalty or disgorgement of profits is to be paid into the Consolidated Fund.

Code on DPAs

The Act imposes upon the DPP and the Director of the SFO a requirement to issue a Code for prosecutors giving guidance on the principles to be applied in determining whether a DPA is likely to be appropriate in a given case.

Preliminary Hearing

Following negotiations between a prosecutor and P, but before the terms are agreed, the prosecutor must apply to the Crown Court at a hearing held in private for a declaration that entering into a DPA with P is likely to be in the interests of justice and that the proposed terms are fair, reasonable and proportionate.

Final Hearing

When a prosecutor and P have agreed terms, a prosecutor must apply to the Crown Court for a declaration that the DPA is in the interests of justice and that its terms are fair, reasonable and proportionate.

Any such declaration and the reasons for approval must be given in open court, at which point the DPA comes into force.

Upon approval, the prosecutor must publish the DPA, the declaration of the court and the court’s reasons for its decision.

Breach of DPA

If while the DPA is in force the prosecutor believes that P has failed to comply with its terms, the prosecutor must bring the matter to the attention of the Crown Court. If the court finds, on a balance of probabilities, that P has failed to comply, it may invite the prosecutor and P to agree proposals to remedy the failure or it may terminate the DPA.

Variation of DPA

The prosecutor and P may agree to vary the terms of the DPA if invited by the court to do so or where it is necessary to avoid a failure to comply by P, in circumstances which had been unforeseen when the DPA was agreed. Any such agreement requires the approval of the Crown Court.

Discontinuance of Proceedings

After the expiry date of the DPA, the proceedings instituted are to be discontinued by the prosecutor. Fresh proceedings may, however, be instituted should it transpire that during the course of negotiations for the DPA, P provided inaccurate, misleading or incomplete information to the prosecutor which he knew or ought to have known was so.

Use of material in criminal proceedings

The statement of facts contained in a DPA is to be treated as an admission by P in any proceedings brought against P for the alleged offence.

Conclusion

These provisions will be of much greater appeal to the SFO as an alternative to criminal prosecution than the current alternative provided by Civil Recovery Orders.

From a corporate perspective, DPAs are likely to provide companies discovering serious fraud or corruption with a greater incentive to make a self-report to the authorities.

Following the recently published review by the SFO of its enforcement policy in a number of areas with regard to corporates, it is instructive to consider the approach of the US DOJ as articulated in its Resource Guide to the US FCPA.

The resolution of cases involving corporates is guided by the Principles of Federal Prosecution of Business Organisations, set out in the U.S. Attorney’s Manual.

This recognises that the resolution of cases by means other than indictment, including non-prosecution and deferred prosecution agreements, may be appropriate in certain circumstances.

Nine factors are identified as being relevant to such a determination:

1. the nature and seriousness of the offence;
2. the pervasiveness of wrongdoing within the corporation, including management        involvement;
3. the corporation’s history of similar misconduct;
4. the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to   cooperate in the investigation of its agents;
5. the existence and effectiveness of the corporation’s pre-existing compliance programme
6. the corporation’s remedial actions;
7. collateral consequences; 
8. the adequacy of the prosecution of responsible individuals;
9. the adequacy of remedies such as civil or regulatory enforcement actions  

In deciding what, if any, action to take, both the DOJ and the SEC place a high premium on Self-reporting:

• Cooperation       
• Remedial action
• Effectiveness of a company’s pre-discovery compliance programme

Most, if not all, of these considerations will be relevant factors also for the SFO, when considering whether to pursue a criminal investigation in any given case.

The clear articulation of these matters in the Resource Guide provides a useful template for use by those corporates which might be exposed to the UK Bribery Act.

THE SFO RAISES THE BAR

The Serious Fraud Office has taken action in the High Court under Part 5 of the Proceeds of Crime Act which has resulted in an Order for a parent company, Mabey Engineering (Holdings) Ltd, to pay £131,201 in recognition of sums it received through share dividends derived from contracts won through unlawful conduct by one of its subsidiaries, Mabey and Johnson Limited, in which it was a principal shareholder.

Following an internal investigation, the subsidiary approached the SFO in 2008 highlighting discovered irregularities and had subsequently fully cooperated with the SFO. In September 2009 it pleaded guilty to charges of corruption and breaches of UN sanctions.

Director of the SFO, Richard Alderman, has highlighted two key messages arises from this settlement:

"First, shareholders who receive the proceeds of crime can expect civil action against them to recover the money. The SFO will pursue this approach vigorously. In this particular case, however, the shareholder was totally unaware of any inappropriate behaviour. The company and the various stakeholders across the group have worked very constructively with the SFO to resolve the situation and we are very happy to acknowledge this.

The second broader point is that shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in. This is very important and we cannot emphasise it enough. It is particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recovery process to pursue investors who have benefited from illegal activity. Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has been lax in this regard."

These proceedings have already excited considerable concern. It has been suggested that by targeting shareholders in this way, the SFO are pushing the law to its limits and that it is unfair to put at risk ordinary shareholders who may not have access to the sort of information available to institutional shareholders.

Richard Alderman is unrepentant. He suggests that institutional shareholders have ownership responsibilities which require them to ensure that the companies in which they have holdings have proper compliance procedures.

With regard to SMEs and family-run concerns, the SFO expects to see those shareholders questioning and, where necessary, seeking to influence company compliance policy and procedures particularly  at annual company meetings which they attend.

There can be no doubt that this development has demonstrated:

1. the SFO’s appetite for taking a tough practical approach in its fight against corruption,
2. the willingness of the SFO to target parent companies for unlawful conduct by their subsidiaries,
3. the importance placed by the SFO upon proper application of the due diligence process, and
4. the SFO’s willingness to focus upon individuals as well as corporate entities in relation to corporate corruption.

The Financial Services Authority (“FSA”) has clarified its approach to UK Anti-Bribery and Corruption (“ABC”) Enforcement.

The FSA is a Regulator with criminal prosecuting powers. It is not a general fraud prosecutor and does not prosecute bribery.  As such, the FSA will investigate bribery cases in order to identify failures in the regulated sector, as a result of which it will either:

1. take regulatory action, or
2. refer the case to The Serious Fraud Office (“SFO”) or other investigator.

The FSA has consolidated its expectations with regard to ABC systems in firms which it regulates. These are embodied in Chapter 7 of the publication ‘Financial Crime: a Guide for Firms’.  This is consistent with, but separate from, the published Ministry of Justice (“MOJ”) Guidance relating to ‘adequate procedures’ under section 7 of the Bribery Act 2010.

When reviewing the adequacy of their anti-corruption policies and procedures, firms within the regulated sector should bear in mind that the scope of the Bribery Act is different from the FSA Rules and Principles.

Before the Bribery Act came into force on 1 July 2011, the FSA brought two significant bribery cases, (Aon and Willis) under Regulatory Principle 3, which requires regulated entities to take reasonable care to organise and control their affairs responsibly and effectively, with adequate managements systems.

Both cases involved systems and controls and governance issues surrounding payments to third parties, rather than direct evidence of bribery.  In each case the conduct was mitigated by settlement at an early stage of the FSA’s investigation.

Thematic Review / Industry Sweep

The FSA has been undertaking a thematic review of a range of randomly selected firms within the regulated banking sector, both large and small.

This review, which commenced in August 2011 and is running through to December 2011, is an intensive programme, which involves interviewing front line sales staff and relationship managers, as well as senior managers.  It also involves looking at due diligence conducted on high risk third party payments to people such as introducers and consultants and may include overseas visits to UK authorised firms, in order to establish how procedures are working in a global context.

Should this review uncover questionable behaviour, then action will be taken – either via the FSA regulatory route or by referral to the SFO or the police.

The FSA intends to publish a comprehensive report early next year, which will highlight any failings in the systems and will make recommendations for future compliance action.