Wednesday 20 June 2012 by Richard Shave

With the proposed introduction of US-style deferred prosecution agreements (DPAs) into UK law expected later this year, it is likely our regulators will soon be armed with a powerful new weapon to fight serious fraud, bribery and corruption. But how should UK companies be reacting to this news and what lessons can be learnt from the use of DPAs in the US and the accompanying eye-watering fines?

Deferred Prosecution Agreements

In brief, DPAs would enable a company suspected of engaging in illegal activity to negotiate an agreement with the prosecutor whereby it agrees to certain conditions, including payment of a fine, in return for the prosecutor agreeing not to prosecute the company provided that certain conditions are fulfilled. The DPA might typically cover a period of two to three years and would include agreement to:

• refrain from further unlawful conduct;
• put in place strong policies and procedures to prevent the repetition of unlawful conduct; and
• engage an independent monitor to assess compliance with new polices and procedures.

Such agreements have long been used by the US Department of Justice: they have been used in connection with KBR, Siemens, BAE and Johnson & Johnson.

Legislative timeline

A consultation paper was published by the Ministry of Justice recently on whether DPAs should be used in the UK, with draft legislation anticipated to be introduced into parliament later this year.

Why are DPAs being proposed?

The proposal for DPAs to be used in the UK follows recent criticism of high-profile civil settlements and negotiated pleas struck by the Serious Fraud Office (SFO). The Innospec judgment in particular saw the courts reiterating that it is for them, and not for prosecutors, to determine sanctions for criminal conduct.

The government has been grappling with the most appropriate way to deal with corporate criminal liability in the context of serious fraud and corruption. The judiciary seems adamant that civil recovery orders are an inappropriate means of resolving such cases with others concerned that they can sometimes appear too lenient; negotiated plea agreements lack the certainty of outcome that companies may be looking for in deciding upon their engagement with the SFO; and a full-blown criminal case could potentially lead to the demise of what might otherwise have been a strong, successful UK business which had encountered an issue and subsequently mended their ways.

So could DPAs be the answer? Quite possibly, but there are practical issues still to be ironed out and a very definite set of pros and cons when considering the separate viewpoints of UK companies and UK prosecutors.

Pros and cons of DPAs for UK companies

For UK companies the key benefits include the possible opportunity to avoid the stigma of criminal conviction and associated debarment from government contracts, together with avoiding the time and expense involved with a full-scale court hearing. Some argue that DPAs may also provide the companies with a greater level of certainty as to outcome.

The introduction of DPAs could also mean UK companies will be on a more equal footing with their US equivalents. The present UK system creates an uneven playing field where businesses can avoid the catastrophic consequences of debarment in the US but not the UK. DPAs will arguably give companies a better chance of coming out of a serious fraud or bribery charge with their business intact and their reputation somewhat less battered than it would be after a full criminal conviction.

On the downside some companies still have concerns over the interaction of the judges and the regulators. Companies will have to weigh up the benefits of self-reporting corrupt conduct against the risk that a negotiated DPA is rejected by the judge. There are also concerns about the confidentiality of information exchanged with the regulator. In a climate in which multi-jurisdictional investigations are increasing, the potential provision of information gleaned through the DPA process to third parties, including other law enforcement organisations, will be a key concern for UK companies.

Pros and cons of DPAs for UK regulators

The proposal for DPAs has been enthusiastically welcomed by regulators. The defendant's cooperation should result in substantial savings of prosecutorial time and money and enable the resource-hit SFO to act efficiently and effectively in appropriate DPA cases whilst still maintaining the capacity to concentrate on other large-scale strategic major fraud prosecutions.

With a more efficient turnover of cases, the SFO will ultimately be able to trigger improvements to the systems and processes at a larger number of UK organisations preventing further fraud and corruption issues in the future. DPAs should also enable the SFO to generate a flow of successful actions and help restore their reputation after the recent damage done by the Tchenguiz brothers' case.

UK regulators' internal funding concerns could also be eased if the eye-watering fines that companies pay in the US become a reality here in the UK under the new DPA regime. The US Department of Justice netted $2.3bn from 32 deferred prosecution agreements in 2010, according to statistics gathered by the lawyers Gibson Dunn.

Much of the fine detail of how DPAs are going to work in practice has yet to be finalised but perhaps one of the key concerns for the regulators will be avoiding any public perception that deferred prosecution equals no prosecution. The interaction and respective roles of the judges and the prosecutors will also be key, together with the degree of transparency of the DPA and the level of information that is shared publicly.

Corporate Response Plans

The stir caused by the likely introduction of DPAs acts as a timely reminder to companies to ensure that they are fully prepared for dealing with any fraud and corruption issues that may arise.

Whether it is establishing exactly what has occurred or liaising within its board, the regulators, the markets, or a host of other internal and external stakeholders it is clear that great care needs to be taken to ensure a decisive, ethical and timely response can be co-ordinated without delay.

Effective companies have focused their attention on lining up a detailed fraud response plan including consideration of:

• how they are going to investigate the issue. i.e. lining up independent investigators and monitors, ideally with no conflicts of interest with other audit or advisory roles;
• their strategy for reporting to the SFO and other relevant regulators, the markets, RNS, including information required, responsible individual and timing considerations; and
• consideration of the impact on key arrangements with funders/suppliers/customers.

Companies will have noted with interest the way other entities have reacted to major fraud and corruption issues. Allegations that Walmart had found evidence of wrongdoing, and then shut down inquiries into the matter, sent its shares tumbling last month, even though the allegations pertained to events that took place more than six years ago.

After the introduction of the Bribery Act, the ongoing re-shaping of the Financial Services Authority and new leadership at the SFO, the UK regulatory landscape continues to go through radical shifts both structurally and legislatively. It will, however, be some time before the true impact of DPAs can be properly assessed. What is clear is that with David Green, the new SFO director, vigorously backing DPAs and promising a new approach to case strategy, and the looming prospect of the SFO bringing their first
showpiece corporate case under the Bribery Act, UK companies will be on their guard.

Richard Shave, director within BDO's Forensics division