francis kean

Francis Kean

Deferred prosecution agreements have long been a part of the U.S. criminal enforcement environment, but they are relatively new in the United Kingdom. In addition, as the U.K. has begun to adopt the use of deferred prosecution agreements, it has adopted the agreements to its own system and legal requirements. In the following guest post, Francis Kean of Willis Towers Watson takes a look at a recent U.K. deferred prosecution agreement, relating to bribery allegations involving a U.K.-based subsidiary of a U.S. company. Francis notes a number of interesting features of the agreement and discusses its implications. Francis’s article previously appeared on the Willis Towers Watson Wire blog (here). I would like to thank Francis for his willingness to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Francis’s article.

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The U.K. subsidiary of a U.S.-registered corporation has recently entered into only the second ever U.K. court sanctioned deferred prosecution agreement (DPA).

DPAs have long been a feature of the U.S. criminal corporate justice system. They recently hit the headlines with the now-infamous Yates Memorandum focusing on personal accountability of senior executives about which I have already blogged.

Their U.K. counterpart is much younger, having only been introduced onto our statute books in 2013 by the Crime and Courts Act. (I have blogged about that too).

One of the main differences between the two systems is the requirement in the U.K. to subject any proposed agreement to detailed scrutiny and approval by the courts. Now we have our second such case. Even though the full judgment has not yet been released (pending prosecution of certain individuals involved), the redacted version offers some fascinating insights into the U.K. courts’ approach.

To recap, DPAs provide a means, in appropriate cases, of resolving offending by corporate entities for fraud, bribery and other economic crime. Under a DPA, a company agrees to certain conditions that are likely to include:

  • a financial penalty
  • compensation to victims
  • disgorgement of profits
  • payment of any reasonable costs of the prosecutor in relation to the alleged offence or the DPA itself
  • co-operation in any investigation related to the alleged offence
  • measures to prevent future offending

The nature of the offences

The case relates to alleged activities of a U.K.-based subsidiary of a U.S. company over a period from 2004 – 2012 in relation to contracts to supply products to its customers overseas.

The activity came to light in 2012 when the U.S. parent undertook a global compliance programme. Having discovered the problems, the company instructed external lawyers who produced a report and submitted it to the Serious Fraud Office, which then undertook its own three-year investigation in which the company cooperated fully.

The judgment discloses that the compliance programme alone had cost the U.S. parent £3 million. We do not know what the additional costs of investigating the 28 implicated contracts in the U.K. subsidiary and cooperating with the SFO were, but they were no doubt substantial as they included reviewing over 95 GB of electronic data, over 27,000 records and interviewing 13 witnesses.

The offences with which the company was charged included conspiracy to bribe and (post implementation of the U.K. Bribery Act), failure to prevent bribery contrary to Section 7 of that Act.

The factors taken into account

The court set out the factors which it was required to consider to be satisfied that the proposed DPA served the interests of justice. These were:

  1. the seriousness of the predicate offence or offences;
  2. the importance of incentivising the exposure and self-reporting of corporate wrongdoing;
  3. the history (or otherwise) of similar conduct;
  4. the attention paid to corporate compliance prior to, at the time of and subsequent to the offending;
  5. the extent to which the entity has changed both in its culture and in relation to relevant personnel;
  6. the impact of prosecution on employees and others innocent of any misconduct.

The judge went on to consider each factor in detail. Although he had no difficulty concluding under (i) that the nature of the offences was grave and serious, he balanced this with a finding under (ii) that the company’s cooperation was comprehensive in that it:

included providing oral summaries of first accounts of interviewees, facilitating the interview of current employees, and providing timely and complete responses to requests for information and material, save for those subject to a proper claim of legal professional privilege. Taken together, XYZ’s timely self-reporting and full and genuine cooperation militates very much in favour of finding that a DPA is likely to be in the interest of justice.

Later in his judgment he also went out of his way also to praise the attitude of the U.S. parent company and its “sterling assistance” and conduct, which he said

…has been exemplary in these very difficult circumstances and should be seen by its customers, shareholders and employees as revealing the highest standards of corporate integrity.

Having reviewed the history of the matter under factor (iii) he then turned to consider factor (v). He was impressed by the fact that none of the company’s current employees or directors were being prosecuted and two senior employees had been dismissed. He concluded that:

XYZ is a culturally different company to that which committed the offences subject to the present DPA application.

Finally, under factor (vi) he accepted that a prosecution and conviction could have disproportionate legal consequences on the company’s employees, especially since “the company was operating on an economic knife edge.”

He concluded:

Putting these features together, there is no doubt that XYZ’s conduct was very serious both in terms of type and scale so that it is not straightforward that a proposed DPA is in principle in the interest of justice. However, it is important to send a clear message, reflecting a policy choice in bringing DPAs into the law of England and Wales, that a company’s shareholders, customers and employees (as well as all those with whom it deals) are far better served by self-reporting and putting in place effective compliance structures. When it does so, that openness must be rewarded and be seen to be worthwhile.

Implications of judgment

What is interesting here is quite how much weight the court attached

  • to the nature, extent and effect of the cooperation provided by the organisation (including the U.S. parent) to the investigation by the prosecuting authority and
  • to the commitment to cultural change

The case is not yet over since separate prosecutions against the individuals involved are still pending. It is interesting in that context to note that the company’s cooperation included “providing oral summaries of first accounts of interviewees, facilitating the interview of current employees” albeit without seeming to have waived all legal professional privilege.

As I have blogged before the question of legal professional privilege is fraught with danger for the senior individuals within a company since the privilege is nearly always that of the company and not the individual. The scope for conflict of interest in these situations is also considerable.

That said, for those involved in deliberate and criminal misconduct there should be limited sympathy anyway.

The situation is arguably different, however, for those at board level whose omissions contribute to the corporate offence of failing to prevent bribery. Whilst such individuals cannot themselves be prosecuted for this offence, their conduct may certainly be impugned. If the “failure to prevent” offence is expanded in the way the SFO wishes so that it covers all economic crime as reported in my recent blog the scope for this would be considerably enhanced.

Depending on the facts, whether in those circumstances a judge could conclude that a company has become “culturally different” (as he did in this case) without wholesale changes occurring first at board level remains to be seen.

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Francis Kean is an Executive Director in Willis Towers Watson’s FINEX Global, where he specializes in insurance for Directors & Officers (D&O) of companies. He joined Willis in 2010 and has 25 years of experience as a leading litigation lawyer specializing in professional indemnity, financial institutions and directors and officers liability in the London insurance market.