Will US-style deals be a damp squib?

Initiative to introduce deferred prosecution agreements is welcome, but there are pitfalls to watch out for, argues Jonathan Fisher, QC

Ministers outlined plans last week for a US-style system of fines for companies in exchange for prosecutors’ suspending a criminal case. The idea of so-called deferred prosecution agreements (DPAs) comes after a series of highly publicised failures in economic crime cases and are an important step in the right direction.

In its consultation paper last week, the Government signalled that the agreements would be available for all corporate fraud, corruption and money laundering. A prosecutor would initiate charges but suspend them pending compliance with agreed terms on a financial penalty, disgorgement of wrongful gains, victim restitution and measures to prevent future offending.

After one to three years the charges would lapse, during which time the agreed terms would be implemented. A judge would approve the arrangement and ensure transparency.

Some critics are wary about differential justice for companies and individuals. But we should not be squeamish about it. The nature of offending is quite different. With a company, the offending focuses on systemic failure; with an individual, it is instances of specific conduct that are under scrutiny.

Coke’s aphorism that a company has no soul to be damned has been overtaken by the development of global corporations with turnovers exceeding the GDPs of many countries. Today, a company’s soul is identified by its corporate reputation and how it engages with stakeholders such as customers, employees, shareholders and society at large. Any damnation is of the commercial and not the religious sort — as BP recently discovered to its cost.

But the opportunity to enter into a DPA may not always represent an offer that cannot be refused. The consultation paper makes clear that although the agreement will not rank as a criminal conviction, an admission of wrongdoing is required; and a company must undertake not to contest the admission in later proceedings.

This raises some serious pitfalls that companies should take care to avoid. Evidence of admitted wrongdoing could be used by a claimant in a civil action to establish liability against the company, leaving assessment of loss and damage as the only “live” issue for a civil court. Obvious scenarios involving investors and creditors can be anticipated, but more unpredictable dangers may lurk around the corner.

In a recent US case after a company accepted responsibility in a DPA for making false statements over the inspection and safety procedures at its damaged nuclear power station, the company was hamstrung when its insurers repudiated cover for the cost of repairing the reactor. The company brought a civil claim against the insurers, arguing that the damage had not been caused intentionally.

The US authorities presented the company with an unpleasant choice: abandon the claim, or face prosecution for contradicting the terms of the DPA. Unsurprisingly the company chose the former. (First Energy Nuclear Operating Company, 2007).

And a company would also be wrong to think that a DPA will produce a swift break with the past. Its admission of wrongdoing could form the factual basis of a prosecution against an employee, significantly limiting his ability to contest the allegation. That is fine, but only if the employee is guilty and the company did not enter the DPA on grounds of commercial expediency.

So while DPAs have huge advantages for companies as an alternative to conviction, they will have to consider their options carefully before rushing into a deal. The decision will not be hard if prosecutors have a good prospect of a conviction; but if prospects are more evenly divided, a company may take its chance and elect trial.

As the law now stands, a prosecutor must prove the company’s directors were personally involved in the wrongdoing. Only the acts of directors can represent the company’s directing mind. That is easy to establish with a small company but next to impossible with a large corporation. This is the prosecutor’s Achilles’ heel, since a company will not enter into a DPA unless it thinks a conviction is ultimately likely.

In the US, though, the law is strikingly different: a company is held vicariously liable for the acts of its employees and the prospect of acquittal is remote. This is not a problem under the Bribery Act 2010, where a company that fails to institute adequate anti-corruption procedures is liable for the acts of its employees. But in other economic crime cases, prosecutors have to prove a director’s personal wrongdoing.

The same will be true under the DPAs. So it is crucial that the proposed legislation provides that a company is vicariously liable for the acts of employees where a prosecutor can show there was fault or dishonesty by the employees concerned. Unless the Government addresses this critical point, the DPA initiative will be a damp squib.

The author is a practising barrister and a visiting professor of law at the London School of Economics