Deferred prosecution agreements: the SFO sets out its expectations

The UK’s Serious Fraud Office released in summer 2019 guidance on precisely what it expects from organisations seeking to enter into deferred prosecution agreements with the agency. Neil Hodge examines the SFO’s guidance and the extent to which it’ll influence whether companies give up evidence.

Back in 2014 the United Kingdom brought in measures aimed at persuading companies to give up evidence – as well as executives and other individuals – in exchange for immunity from prosecution. In summer 2019, in a bid to encourage more organisations to come forward, the Serious Fraud Office (SFO), the country’s anti-corruption agency, released guidance for the first time ever that lets corporates know exactly what it expects from them to be considered for leniency.

Published in August as part of its ‘operational handbook’, the SFO says in its five page Corporate Co-Operation Guidance note that co-operation means ‘providing assistance that goes above and beyond what the law requires’. This definition includes identifying suspected wrongdoing and criminal conduct, naming the people responsible, reporting suspicions to the SFO ‘within a reasonable time’, and preserving available evidence in a variety of paper and digital formats and providing it promptly.

The SFO wants companies to identify potential witnesses, provide contact details of current and former employees (and quickly), provide industry knowledge (especially regarding context and common practices), and identify potential defences that are particular to the market or industry at issue.

 

‘This clear shopping list of things the SFO likes to see is a step in the right direction after many years of companies having to glean pointers from speeches as to what the SFO wants to see from a cooperating company’

Matthew Bruce, partner at Freshfields

 

‘Genuine co-operation’, says the agency, ‘is inconsistent with: protecting specific individuals or unjustifiably blaming others; putting subjects on notice and creating a danger of tampering with evidence or testimony; silence about selected issues; and tactical delay or information overloads.’

The SFO is also quick to say that ‘co-operation – even full, robust co-operation  does not guarantee any particular outcome’, a stance that could be (and may already have been) counter-productive. Several lawyers suggest such a position may have prevented companies from going down the deferred prosecution agreement [DPA] route, and instead prompted them to take their chances in court.

While the guidance may seem draconian to some, lawyers point out that the SFO stopped short of proposing controversial measures that would have asked companies to hand over confidential evidence protected by legal privilege. This is a proposal the SFO has been pushing rigorously under former director David Green and latterly by new director, Lisa Osofsky, since she took office in August 2019.

Instead, the SFO has said that companies should have privileged evidence ‘certified’ by independent counsel in order to retain it. Simon Airey, litigation and regulatory partner at Paul Hastings, says that the requirement to obtain independent certification of a claim to legal professional privilege is an ‘inconvenience’ that ‘in many instances will add significantly to cost’. He adds though that it ‘will not be a relevant consideration for companies that hope to obtain maximum credit for co-operation by waiving privilege’.

In one respect, says Airey, this requirement ‘is consistent with existing law that a claim to privilege must be properly established but no doubt reflects the fact that unmeritorious claims have been made in the past’. Unfortunately, he adds, ‘this requirement effectively tars all companies with the same brush’. A better approach, he says, might have been to insist on a detailed explanation of the claim to privilege from a lawyer, followed by a process of independent certification in cases of dispute. This requirement effectively puts the burden and the cost onto the company in all cases, says Airey.

 

‘Notwithstanding the provision of guidance, as the guidance itself states, each case will turn on its own facts, so the position remains – one company’s genuine cooperation is another’s obstruction’

Neil Swift, partner at Peters & Peters Solicitors

 

It is the first time the fraud agency has formally set out expectations integral to DPAs, United States-style corporate plea deals introduced in the UK in 2014 as a way of securing faster punishments against companies. Under the arrangement, companies that self-report wrongdoing can avoid prosecution by agreeing to overhaul their businesses’ compliance measures, pay a fine and be subject to a monitoring programme.

In the five years since they came into being, just five companies have accepted criminal responsibility through DPAs – and no senior executives have been convicted in relation to any of those cases. This is ‘a record that may lead some to question if cooperation is the right thing to do,’ says Matthew Bruce, a partner at Freshfields.

During DPAs companies surrender evidence the SFO can use to prosecute high-ranking individuals involved. But such outcomes are never certain. Despite reaching a DPA with Tesco, a judge threw out the agency’s prosecution of three former executives. Meanwhile, the SFO’s £500m agreement with Rolls-Royce in January 2017 was followed two years later by its decision not to bring charges against any of the company’s former employees. In July, the SFO lost a case against three former executives of metals company Sarclad, which signed a DPA in 2016.

Several lawyers say that the list of requirements to attain leniency is long and comprehensive, and at long last provides a template of what the SFO actually wants companies to do if they want to be considered for leniency. While ‘the guidance doesn't cover everything’, says Bruce, ‘this clear shopping list of things the SFO likes to see is a step in the right direction after many years of companies having to glean pointers from speeches as to what the SFO wants to see from a cooperating company.’

However, some lawyers add that the list of criteria is perhaps more indicative of the areas where the SFO has struggled to find the appropriate quality of evidence needed to prosecute cases successfully in the past. Richard Reichman, a partner specialising in corporate crime, financial crime and regulatory investigations at law firm BCL Solicitors, says that the note provides ‘much greater detail regarding what is expected of corporates than what they can expect from the SFO in return.’

Neil Swift, a partner at Peters & Peters Solicitors, says that ‘superficially, the guidance is a check list of best practice in conducting an internal investigation’. Most of it, he says, represents a ‘statement of the obvious’, such as retaining and preserving the integrity of documents and digital material.

 

‘Mere compliance with a checklist [does not] mean that a company automatically escapes prosecution – the SFO makes that clear’

Marco Bollini, Vice Chair of the IBA Corporate Counsel Forum

 

According to Swift, the SFO’s guidance ‘spells out what the SFO thinks the picture of cooperation looks like, as well as what it does not’. But he adds that it remains ‘highly subjective’. ‘One person’s reasonable time before reporting is another’s tactical delay, while one person’s prompt provision of comprehensive evidence is another’s information overload,’ says Swift. ‘Notwithstanding the provision of guidance, as the guidance itself states, each case will turn on its own facts, so the position remains – one company’s genuine cooperation is another’s obstruction.’ 

There are other contentious areas within the guidance. Swift adds that the cooperation guidance also appears to require the company to take steps which bypass procedural safeguards for individuals – in particular, the requirement to make arrangements for employees and agents to travel to the UK for interview by the SFO. As an investigative agency, the SFO has available to it the ability to obtain European Investigation Orders, mutual legal assistance and extradition. Swift believes that such powers may pose problems. ‘Incentivising the company to apply leverage to such individuals risks prejudicing the rights and procedural safeguards which might be available to them,’ he says.

Indeed, the part of the guidance relating to how to deal with individuals is perhaps the most problematic. ‘On the one hand’, says Swift, ‘the SFO considers cooperation to include being consulted before – and presumably agreeing to – interviews with suspects and individuals. However, where obligations are owed to other regulators, to stakeholders, or to the market, the company might need to act in a way which contradicts the SFO’s desire’. 

Jessica Parker, Co-Chair of the IBA Business Crime Committee and a partner at Corker Binning, agrees that the guidance is ‘not remarkably different from established best practice’. ‘The guidance appears directed at ensuring where the corporate has commissioned an investigation itself, it is done in such a way that the product of that investigation can be relied upon in future proceedings,’ says Parker. ‘In the past the SFO has come unstuck where over-reliance on a privately conducted investigation did not stand up to judicial scrutiny.’

Yet lawyers have pinpointed one big problem with the SFO’s cooperation guidance: will companies think it is worthwhile? Marco Bollini, Vice Chair of the IBA Corporate Counsel Forum, says that from a practical point of view, ‘a checklist is not going to affect whether a company decides to cooperate with a regulator or not. That decision will come down to what the company’s policies are and to what is the easiest course of action for the company in question and whether it is effective to cooperate at the earliest opportunity rather than contest the case. Nor does the mere compliance with a checklist mean that a company automatically escapes prosecution – the SFO makes that clear.’

 

‘All companies want to avoid prosecution wherever possible, but if the threshold to attain eligibility to even be considered for leniency is too high, it may deter some companies from seeking a deal’

Jitka Logesová, Co-Chair of the IBA Anti-Corruption Committee

 

Several lawyers have suggested that some companies put in a position of either playing ball or playing hardball with the SFO may put the decision down to cost considerations of a fine or weighing up their chances in court. Specifically, a DPA can attract a 50 per cent discount, while waiting to be charged and pleading guilty at court allows a 30 per cent reduction.

The SFO’s recent track record could be a persuader. One lawyer, who declined to be named, is aware of one company that did not proceed with DPA discussions because the size of the penalty was too big and – to date – has faced no sanction.

‘Lawyers argue that some businesses that have agreed to a DPA may not have been convicted if they had rejected the invitation to enter into DPA discussions and been prosecuted,’ says Parker. ‘In English law, for many offences the company will only be guilty if the person or persons who are the “directing mind and will” of the corporate are guilty. To date, the SFO has failed to convict any person who fulfils that role: for example, in the cases of Tesco and Sarclad, all of the individuals whose conduct had been the lynchpin of the DPA were acquitted. With this track record, should businesses go through the DPA process or focus on remediating and moving on?’

Swift says that since the SFO has so far failed to secure the conviction of any of the allegedly culpable individuals, companies may wish to weigh up the pros and cons of cooperating. ‘Given that corporate liability arises solely as a result of the conduct of those individuals, those advising companies discovering misconduct and considering self-reporting should give very serious consideration to the strength of the evidence and the ability of the SFO to secure a conviction when considering whether or not to try and do a deal,’ he says.

Some experts believe that the SFO guidance acts as a threshold to focus only on the most serious examples of bribery and corruption cases. Claire Shaw, a consultant solicitor at Keystone Law, criticises the SFO guidance for focusing on ‘high-end’ financial crime, where the risks of prosecution (and reward of leniency) are greater, rather than producing guidance as to what to do if companies find low to medium-level wrongdoing. ‘In those cases, if you investigate, take action, remediate and move on, why would you want to involve yourself in such hugely costly cooperation? The balance would only favour cooperation if you were confident that the organisation itself would be likely to be prosecuted – and convicted – on the evidence you have uncovered,’ she says.

International perspective

While the UK’s adoption of DPAs must give a nod to the US where companies cutting deals with regulators and enforcement agencies is more commonplace, lawyers say that the SFO’s approach is different – and quite bold – in several respects.

Jitka Logesová, Co-Chair of the IBA Anti-Corruption Committee and Head of the firm-wide Regulatory and Corporate Investigations Practice at Wolf Theiss, says that there are relatively few countries in Europe – France and the UK are some of the notable exceptions – that offer workable non-trial settlements (a kind of leniency regime) for corporate bribery and corruption offences. The US, on the other hand, has a long history of settling corruption cases outside of court proceedings. Some European countries, such as Germany, do not yet have laws for strict criminal corporate liability, she says. And while the European Union does offer leniency and fine reductions if companies self-report or cooperate in cartel investigations, it does not offer companies leniency for bribery and corruption offences.

Logesová believes that leniency regimes can be attractive ‘if enough companies understand what they involve and how they work. As leniency regimes are not widespread around the world, most companies have little experience as to how they work, especially in bribery and corruption cases.’

‘They also have little experience of the level of cooperation that is needed to be deemed eligible for leniency, and whether it means potentially informing on other parties, and not just their own wrongdoing,’ adds Logesová. ‘All companies want to avoid prosecution wherever possible, but if the threshold to attain eligibility to even be considered for leniency is too high, it may deter some companies from seeking a deal.’

Aaron Stephens, Vice-Chair of the IBA Business Crime Committee and a partner at King & Spalding, welcomes the SFO’s decision to publish the guidance, but adds that it is ‘hardly earth-shattering’ and is ‘mainly common sense’, largely following a precedent set by the US several years ago.

Following years of criticism that executives at leading companies and financial firms escaped jail during the financial crisis, the Department of Justice issued the ‘Yates Memorandum’ to federal prosecutors on 9 September 2015. This aimed to bring individual employees – and not just their companies – to book. The approach also puts pressure on corporations to turn over evidence against their executives.

‘Corporations can only commit crimes through flesh-and-blood people,’ said Sally Q Yates, the former deputy attorney general who championed the new approach. ‘It’s only fair that the people who are responsible for committing those crimes be held accountable. The public needs to have confidence that there is one system of justice and it applies equally regardless of whether that crime occurs on a street corner or in a boardroom,’ she added.

The Yates Memo tells civil and criminal investigators to target individual employees from the beginning. It also states that companies cannot get credit for cooperating with the government – and thus get a substantial reduction in fines and obtain a civil settlement rather than a criminal charge – unless they identify employees and turn over evidence against them, ‘regardless of their position, status or seniority.’

Despite the apparent similarities, Stephens says that there are some very clear differences in the approaches that US and UK enforcement agencies take with regards to considering deals with companies. Generally speaking, he says, the evidence threshold to prove corporate liability for fraud or economic crime is much higher in the UK than in the US, where it is more common for companies to self-report wrongdoing and achieve a settlement. Another difference, he says, is that unlike the UK, in the US individuals are also eligible to be considered for a DPA in return for cooperation: the offer does not just apply to companies.

Stephens adds that the SFO appears to expect earlier engagement by corporates than is the case with US investigators such as the Department of Justice. ‘To be considered for a DPA in the UK, companies are told that they should consult with the SFO before interviewing potential witnesses or suspects or taking other concrete steps,’ says Stephens. ‘But the obvious question arises: how can companies know if they have any crimes to report unless they have already carried out some investigations?’

‘The SFO’s view is that company actions can prejudice any future SFO investigations, so it wants companies to tread carefully where any risk of prejudice exists. US enforcement agencies, on the other hand, have traditionally been more relaxed about timing issues, understanding that companies will want to know or have a strong suspicion that something has actually happened before making a self-report.’