Second Deferred Prosecution Agreement sets legal precedent

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

On 8 July 2016 Southwark Crown Court approved the second Deferred Prosecution Agreement (DPA) in relation to offences of bribery and corruption. The judgment is recognised as significant by both the judge himself and by the Director of the Serious Fraud Office as it sets down new principles for considering whether a DPA is in the public interest.

The charges in this case were brought under both the “new” Bribery Act 2010 and the previous “old” legislation governing such offences. The reason for charges under the different criminal regimes for bribery and corruption was because the offences covered a period which both pre-dated and post-dated the effective date of the Bribery Act, 1 July 2011.

The judgment was given by the President of the Queen’s Bench Division, Sir Brian Leveson. The parties’ names have been anonymised due to ongoing related legal proceedings, presumably against other defendants. For the time being, until those other proceedings have been concluded, it will not be possible for the Serious Fraud Office (SFO) (or anyone) to publish details of the DPA itself, nor the accompanying statement of facts, both of which are required to be published ordinarily. The SFO’s own press release is here. A link within their press release takes the reader to the court’s redacted judgment.

The defendant that was the counterparty to the DPA with the SFO is, for the time being, to be known as XYZ Ltd.

The DPA follows the scheme prescribed by section 45 and Schedule 17 of the Crime and Courts Act 2013.

Factual background

XYZ Ltd secured contracts in foreign jurisdictions.

The judgment recounts that a total of 74 contracts were examined and that 28 are said to be “implicated”, i.e. there is sufficient evidence to suggest that each contract was procured as a result of the offer of, or payment of, bribes. The total gross profit from the implicated contracts is said to be £6,553,085.

XYZ Ltd is wholly owned by a US corporation, to be known as ABC Companies LLC. The significance of this is that ABC received both management fees and dividend payments from XYZ.

In late 2011 ABC sought to put in place adequate compliance procedures for XYZ. It was during this compliance process that at the end of 2012 it came to light that concerns were raised about the way in which certain contracts had been secured.

XYZ took immediate action by retaining a law firm to conduct an internal investigation, following which XYZ self-reported and the law firm continued to supply the SFO with information while the SFO conducted its own investigations. The judgment further records that two further self-reports were made.

Basis of the DPA

The judge records that the basis of the DPA is that for a period of between three and five years the SFO will agree to suspend the indictment and, subject to compliance with the terms of the DPA, to discontinue the proceedings. Conditions include that:

1. there is no protection against prosecution of any present or former officer, employee or agent of the company;
2. there is no protection of XYZ for any offences not disclosed by it to the SFO prior to the date of the agreement; and
3. prosecution can also still follow if XYZ provided information to the SFO which it knew or ought to have known was inaccurate, misleading or incomplete.

Other requirements include:

1. disgorgement of gross profits of £6,201,085 (of which £1,953,085 will be contributed by ABC, being the repayment by ABC of a significant proportion of dividends that it had received from XYZ, albeit entirely innocently);
2. payment of a financial penalty of £352,000, being a reasonable estimate of the unencumbered balance of cash available following a review by the SFO of XYZ’s cash flow projections over three years;
3. past and future co-operation with the SFO (as further described) in all matters relating to the conduct arising out of the circumstances of the draft indictment; and
4. review, maintenance of and reporting to the SFO on the organisation’s existing compliance programme (as further described).

The importance of XYZ’s conduct following discovery of the illegal conduct

The factors which mattered to the judge when deciding whether to permit a DPA included that:

1. the self-report was prompt;
2. the internal investigation was fully disclosed;
3. XYZ provided its co-operation;
4. XYZ has implemented new training programmes, policies and procedures and that it was the implementation which led to the discovery if the conduct (the judge also took note that there was no evidence that the parent company, ABC, knew anything about the illegal conduct); and
5. prosecution and conviction would lead to significant legal costs and a financial penalty and that XYZ would risk insolvency harming the interest of workers, suppliers and the wider community.

Financial terms of the DPA

1. Compensation was not appropriate as it was not possible to identify any victims who could be compensated.
2. Disgorgement and financial penalties should be determined in a context where XYZ has limited means to pay and the maximum amount which it could pay without going into insolvency is said to be £352,000.
3. Disgorgement of profits of £3.3m was proposed along with a financial penalty of £1.3m, in addition to which XYZ and ABC have agreed that ABC will also return £1,953,085 in dividends for XYZ to pay towards disgorgement, so that the total is £6,201,085, i.e. the total gross profit less the sum of £352,000 available over the period from XYZ’s resources.
4. The financial penalty was proposed by the SFO at 250% of profits which would have meant £16.4m.
5. However, in accordance with paragraph 5(4) of Schedule 17, discounting that sum for a guilty plea by 50% was appropriate in order to encourage others to self-report. This would reduce the penalty to £8.2m.
6. The judge concluded that the interests of justice do not require the defendant to be pursued into insolvency.
7. The SFO accountants accept that the maximum XYZ could pay was £352,000 from its own resources and that beyond that it would need support from ABC.
8. In view of XYZ’s financial situation, the SFO agreed not to pursue its costs.

Conclusion

As the judge recognised in his judgment, this case enabled the court to identify certain principles which the court is likely to consider in future cases when considering whether a future DPA is in the interests of justice, and that it is therefore of use to defendants and their advisers alike. The case will also demonstrate to companies that suspect illegal conduct has taken place the benefits of self-reporting, rather than ignoring such conduct or covering it up. The judge also points out that ABC was ignorant of the conduct, but in other cases it is possible that a parent company could have set up a subsidiary in order to use as a vehicle for corrupt payments. In such cases he indicates that is likely to lead to a prosecution of the parent under section 7(1) of the Bribery Act 2010. The onus then passes to the parent to establish a defence that it had put in place adequate procedures to prevent persons associated with the company from undertaking bribery.

This judgment, although not yet widely reported, due to its anonymisation, ought to encourage corporations to come forward and self-report illegal conduct. Hitherto, it is believed that corporates and some advisers have been hesitant about self-reporting, believing that it would be a gift to the SFO and only ever a downside for the corporate. In our view, this was always an incorrect assumption and risks tainting an otherwise clean management with the obvious allegation of a cover-up.