THE MINISTRY OF JUSTICE CONSULTATION ON A NEW ENFORCEMENT TOOL TO DEAL WITH ECONOMIC CRIME COMMITTED BY COMMERCIAL ORGANSATIONS:

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1 RESPONSE OF PINSENT MASONS LLP TO THE MINISTRY OF JUSTICE CONSULTATION ON A NEW ENFORCEMENT TOOL TO DEAL WITH ECONOMIC CRIME COMMITTED BY COMMERCIAL ORGANSATIONS: DEFERRED PROSECUTION AGREEMENTS Introductory Remarks Pinsent Masons LLP is an international law firm headquartered in London with offices throughout the UK and offices in Europe, Asia and the Middle East. Pinsent Masons regularly acts for UK and overseas companies in relation to a wide spectrum of criminal law issues including bribery, fraud, money laundering, sanctions and export control violations, anti-competitive cartels, tax and duty related offences, Companies Act offences, Financial Services and Managements Act offences, consumer protection and trading standards, data protection, health and safety, environment and other regulatory or strict liability statutory offences. Often the corporate criminal cases in which Pinsent Masons is involved are multi-jurisdictional in that there may be concurrent jurisdiction between law enforcement bodies in the UK (for example between the Serious Fraud Office and the Crown Office and Procurator Fiscal Service in Scotland in corporate bribery and fraud cases) or amongst UK law enforcement and overseas law enforcement, most commonly between the UK and the US. In answering the questions posed by the Consultation we have sought to: 1. highlight the practical difficulties that, in our experience, arise under the current criminal justice regime in so far as it extends to companies; and 2. explain the benefits that deferred prosecution agreements would bring as an additional avenue for dealing with corporate offending. Questions 1 Do you agree that deferred prosecution agreements have the potential to improve the way in which economic crime committed by commercial organisations is dealt with in England and Wales? Self-reporting and self-policing We consider the scale of corporate offending is currently under reported due to the inadequacy of the tools currently available to law enforcement and the lack of incentives for a company to self-report criminal conduct. In our opinion and experience, self-reporting and voluntary disclosures by companies to prosecutors when criminal conduct is discovered which is attributable to the company in the UK remains low. This is despite the introduction of self-reporting guidance by the Serious Fraud Office, and that companies may commit money laundering offences under the Proceeds of Crime Act 2002 if they do not disclose suspicions of having acquired criminal property or of facilitating others to do so. In addition, directors of a company who do not disclose the discovery of fraud or other criminal conduct by the company or its employees to 1

2 the company's auditors may commit other offences under the Companies Act or Fraud Act. Continued corporate and personal offending by other directors and senior managers can then follow because the decision to keep the predicate offfending under wraps may lead to lenders, shareholders and other directors being misled. In our experience, despite the risk or corporate and personal criminal liability that can occur if criminal conduct is not disclosed, the reasons that companies do not make the required disclosures are either because they are not aware that a failure to do so can lead to other offences being committed; or the uncertainty of the consequences for the company and its directors of self-reporting means it is an unattractive option. Self-reporting to law enforcement could lead to an open ended and lengthy criminal investigation being launched which is likely to undermine the company's ability to continue its business (it may for example lead to company funds being restrained, or important business documents and computers being seized). The launch of a criminal investigation certainly damages a company's reputation for the duration of a criminal investigation which may last several years. The uncertainty caused by the length of time a criminal investigation takes and by not knowing what will be uncovered leads to accounts being qualified by auditors which in turn can cause decreases in share value, an inability to access finance, and difficulties with tendering for contracts. Innocent directors and employees are often tarnished by association. A conviction of a company for the economic crimes of fraud, money laundering, or bribery could have significant consequences, including debarment from public sector contracts in the EU and US, and withdrawal of lending facilities (a criminal conviction for bribery or fraud is a standard default event in facility agreements). These factors weigh against selfreporting. Unfortunately, by not reporting the criminal conduct to the authorities, other corporate and personal offences may be committed and a pervasive unethical culture may develop. In contrast, in the US, self-reporting the discovery of criminality implicating the corporate body is commonplace. From what we have seen, the main reason that companies selfreport in the US is that it increases the certainty of the enforcement outcome and that considerable credit for doing so is given. In turn, the fact that companies self-report misconduct provides valuable intelligence to law enforcement that other parties to a transaction, supply chain, or sector may also be involved in criminality. There is therefore an increased risk of detection. The fines and restitution paid by companies subject to US enforcement are significant. The risk of detection, coupled with the sanctions imposed on companies, has led to a US companies prioritising compliance and the promotion of business ethics. In short, the introduction of deferred prosecution agreements is likely to increase corporate self-reporting because it gives more certainty of outcome. It will also, in our opinion, lead to increased corporate self-policing. Deterrence and rehabilitation Deterrence and rehabilitation are important principles of the criminal justice system. It is important that enforcement of economic crime is increased to deter others from participating in criminal behaviour. Likewise, companies should be encouraged to root out criminal behaviour connected to its business, and to promote a culture where corruption or deliberate criminal conduct has no place. The introduction of deferred prosecution agreements as an alternative to criminal prosecution and conviction would, in our view, help to achieve that objective. The introduction of deferred prosecution agreements would therefore help achieve the Government's objective of tackling white collar crime. Penal but proportionate remedy 2

3 Some commentators have described deferred prosecution agreements as being soft on crime and argue that corporate criminality should not be treated any differently from criminality by individuals. We disagree for two principal reasons: 1. Deferred prosecution agreements in the US are penal in nature and impose onerous conditions in terms of restitution and rehabilitation on corporate offenders. We would anticipate that deferred prosecution agreements in the UK would be similarly penal and may help to bring parity between the penalties paid by companies in the US and the UK. In addition, the practice in the US, and also increasingly in the UK under existing self-reporting regimes, is that options to resolve criminal offences short of prosecution necessitate the company conducting an internal investigation and making disclosure of the totality of corporate offending. The cost of the investigation is therefore borne by the company and quid pro quo for avoiding the uncertainty of a criminal investigation and prosecution is that corporate misconduct must be fully disclosed. There is a considerable incentive on companies to get to the bottom of historical misconduct, to root out criminal conduct, and to come clean. As companies bear the cost of the investigation, deferred prosecution agreements are likely to be more penal, at least in monetary terms, than a criminal investigation by law enforcement and fine following conviction. 2. Corporate offending is different from individual offending. Companies are legal entities but they do not act on their own volition. They do not have a separate guilty mind from the individuals who embody the company. Companies only commit criminal offences because criminality on the part of a company's senior management is in law attributable to the company. A company may be criminally liable because of the action of one rogue director or senior manager. However, companies are made up of numerous other employees, officers and shareholders who may not have been involved in the criminal conduct but who nonetheless suffer if a company is prosecuted and convicted. It seems to us that deferred prosecution agreements have the advantages of attributing the correct label to the misconduct, penalising companies, and enabling swifter restitution and rehabilitation, while reducing the consequences for innocent directors, employees and stakeholders. We would note that in many countries, for example Germany, there is no concept of corporate criminality. Instead the criminal law focuses on the actions of the criminal individuals and administrative or civil penalties are imposed. Jurisdiction and double jeopardy For deferred prosecution agreements to be effective, the Government would also need to address the interlinked issues of concurrent jurisdiction for many corporate offences and double jeopardy. This is particularly pressing in respect of UK companies over which the US also has jurisdiction due to the international nature of their operations or through the use of the US financial system. In recent years, the US' Department of Justice has pursued bribery and fraud cases against a number of British and European companies. For companies to be encouraged to self-report to the UK authorities and to be incentivised to enter into a deferred prosecution agreement they need to know that it will lead to complete closure of the issues covered by the deferred prosecution agreement. "Global settlements" need to be achievable. A memorandum of understanding should therefore be agreed between the UK and the US (and indeed other jurisdictions) on how cases involving concurrent jurisdiction will be handled. Paragraph 24 of the Consultation notes that the Ministry of Justice is discussing the application of Deferred Prosecution Agreements with the devolved administrations. As matters currently stand, the criminal authorities of England & Wales and Scotland have concurrent jurisdiction in relation to bribery committed overseas by UK companies. Clarity and certainty are therefore needed as to how deferred prosecution agreements will work in cases of concurrent jurisdiction within the UK. Deferred prosecution agreements should ideally be UK wide with similar regimes operating in England, Wales, Northern Ireland and Scotland. Alternatively, a memorandum of understanding is needed between the Attorney General and Scotland's Lord Advocate. 3

4 2 Do you agree that deferred prosecution agreements should be applied only in cases of economic crime? Could or should they be used more widely? No. It should be used more widely to address any corporate offending. The principles enumerated in the Consultation are equally applicable to non-economic corporate offending. There is currently an unsatisfactory inconsistency in the tools available to different law enforcement agencies and a variable approach by law enforcers whereby HM Revenue & Customs, the Financial Services Authority and the Office of Fair Trading can offer leniency, civil penalties or regulatory disposals of serious offending which is potentially attributable to a company in return for self-reporting and co-operation with the investigative process, while the Serious Fraud Office, Crown Prosecution Service, Trading Standards, the Health and Safety Executive, the Environment Agency and other law enforcement bodies have limited options short of criminal prosecution. It is irrational that corporate criminality can be disposed of by alternatives to criminal prosecution by some law enforcement bodies but not by other prosecutors and regulators. The variable tools available to different law enforcement agencies undermine the principles of consistency and transparency which should underpin the criminal justice system. Economic crime is arguably more serious than strict liability regulatory offences such as contraventions of the Health and Safety at Work Act because it involves deliberate misconduct whereas strict liability offences can arise where there is no criminal intent. Lord Justice Thomas in his sentencing remarks in R v Innospec Ltd described corporate bribery of foreign public officials as at the top end of corporate offending. It cannot therefore be right that a company which engages in an act of bribery or fraud has an opportunity to avoid the consequences of a criminal investigation and prosecution, whilst a company which commits a strict liability regulatory offence cannot. The introduction of deferred prosecution agreements for regulatory offences may also help speed up the time it takes for the victims of such crimes to obtain restitution. Often civil claims and public inquiries are delayed pending the criminal case which can take several years to come to court. That is unsatisfactory for the victims of an incident as well as for the accused company. 3 Do you agree that these are the right factors to which prosecutors should have regard in considering whether to enter into a DPA? We agree with the list of factors and would add three more: 1. Corporate self-reporting should be a stand alone and specific factor. Companies which self-report corporate misconduct should be given considerable credit for having done so as the conduct may not otherwise have come to the attention of the authorities and it is indicative of a company which wishes to behave in a transparent way and which does not tolerate criminality by its officers or employees. There should be a clear distinction between generally ethical companies which self-report an instance of bad behaviour within its business and non-ethical companies whose conduct is uncovered by law enforcement. 2. Whether the company has conducted a reasonable and proportionate investigation into the alleged conduct and confirms that it has disclosed the full extent of criminal conduct which has been discovered. Deferred prosecution agreements should only be offered to companies which are prepared to clear the slate of corporate misconduct. 3. Whether there have been any significant corporate changes which mean that the company liable to prosecution is significantly differently from the company which carried out the offending, such as entirely new shareholders and management. Criminal conduct often comes to light following a corporate acquisition or restructuring which may result in a considerably different company in terms of personnel and structure from the company that existed at the time of the criminal conduct. 4

5 4 Do you think it would be appropriate to include any further components in a Code of Practice for prosecutors? We agree that the Code of Practice should provide for the protection of legal professional privilege. Legal professional privilege is a cornerstone of the UK's legal system and the authorities should not require disclosure of privileged material as part of a company's cooperation with a process towards achieving a deferred prosecution agreement. In addition, we consider the Code should cover the following: 1. That a deferred prosecution agreement should only be considered where there is a sufficiency of evidence to give a realistic prospect of a conviction. Where there is insufficient evidence to the criminal standard, deferred prosecution agreements would be inappropriate and prosecutors should either not proceed or proceed with civil recovery if there is sufficient evidence that, on the balance of probabilities, the company benefitted from unlawful conduct. 2. Issues of confidentiality and admissibility of the deferred prosecution agreement and materials provided to the prosecutor by the co-operating company in any other criminal or civil proceedings, and the circumstances in which those documents may be provided to overseas law enforcement; 3. The approach that prosecutors should take to issues of concurrent jurisdiction with other UK and overseas prosecutors, and the interlinked issue of double jeopardy; 4. The approach prosecutors should take to calculating the financial benefit to the organisation and how disgorgement will work in conjunction with reparation of victims. Paragraph 88 of the Consultation refers to the disgorgement of "profits" or "benefit". Profit and benefit are two different principles and there is a need for clarity as to which will apply. Confiscation cases under the Proceeds of Crime Act 2002 have become extremely draconian with entire revenues being confiscated without consideration of legitimate costs and overheads. Whilst that may be appropriate when dealing with serious organised crime and criminal enterprises, it can be disproportionate when dealing with companies which are primarily legitimate businesses. We consider that the starting point for disgorgement should be a net profit based assessment. This would act as a major incentive for companies to self-report and would leave more money for the reparation of victims or for investment in compliance going forward. 5. The need for a proportionate approach to the investigation depending on the size of the company. We would anticipate that prosecutors will offer deferred prosecution agreements to companies which are prepared to conduct internal investigations, involving external lawyers and forensic accountants, and to make full disclosures of criminal conduct. That is the current practice of the Serious Fraud Office in respect of corporate self-reporting. In our experience, the level of investigation required can be overly onerous. Unless a proportionate principle is applied and specified for in the Code, deferred prosecution agreements may only be viable options for larger companies. 6. The need for transparency of enforcement decision making. There have recently been cases where the SFO decided not to take any action against companies which have self-reported to it. Where such decisions are taken, there should be anonymised publication of the case and the reason for the decision. 5 Do you agree that the Sentencing Council is the right body to develop such a guideline for DPAs? Yes, in respect of the penalty element of the deferred prosecution agreement. The other elements of the deferred prosecution agreement including disgorgement, reparation and monitoring guidance could also be issued by the Sentencing Council but in consultation with other bodies such as the Ministry of Justice. 5

6 6 What do you think would be most useful in a guideline for DPAs? From the perspective of a solicitor advising a company on the pros and cons of selfreporting and seeking a deferred prosecution agreement, specific guidelines and ranges of penalties would be most useful. The specific guidelines and penalty ranges should apply in most cases. However, there will be cases where applicable ranges may be unjust and therefore we consider some degree of flexibility should also be included by way of overarching narrative guidelines on the principles. The appointment of compliance monitors should be addressed in the guidelines. The courts in both the UK and the US have been critical of the costs associated with compliance monitors. We would accordingly suggest that the use of compliance monitors is subject to detailed guidance on the selection criteria, their role and the fees they may charge. The fees charged should be liable to supervision by the prosecutor and, in the last resort, the courts. In cases involving a self-reporting and co-operating company, compliance monitors may be an unnecessary burden on the company. 7 Do you agree that the preliminary hearing should take place in private? Yes- that is essential because of the risk that proceeding by way of a deferred prosecution agreement may not be sanctioned by the court. A public hearing could prejudice an accused company's ability to defend itself should it disagree with the terms of any subsequent indictment. A public hearing is also likely to trigger reporting duties to the market, investors and lenders which would be premature as whether or not the case will proceed by a deferred prosecution would be uncertain until after the hearing. 8 Do you agree that the first test for a judge to apply at a preliminary hearing is whether a DPA is in the "interests of justice"? However, we do not consider that a judge will necessarily be able to reach a considered view on whether a deferred prosecution agreement will be in the interests of justice on the basis of an outline of the agreed basic facts proposed at paragraph 106 of the Consultation. We are mindful of the courts criticisms of the Serious Fraud Office in the recent judicial review by Robert and Vincent Tchenquiz that insufficient information was provided the judge by the Serious Fraud Office in its application to obtain search warrants. There is a risk that a broad brush and overly simple approach to the information provided to a judge at the preliminary hearing stage could lead to later criticism by the court that it was not provided with all relevant facts when it first considered the merits of a deferred prosecution agreement. To reduce the risk of deferred prosecution agreements being rejected at the final approval stage, we would suggest that more detailed information is provided to the judge at the preliminary hearing stage, including the provision of relevant exhibits and any expert evidence. 9 Do you agree that at a preliminary hearing the judge should also apply a test as to whether the emerging conditions of a DPA are "fair, reasonable and proportionate"? 10 Do you agree with the proposed possible contents of a DPA as outlined? It is noted at paragraph 79 of the Consultation that deferred prosecution agreements would involve the admission of certain facts and wrongdoing. There is a need to be clear as to whether or not companies would be required to admit in the agreement specific criminal offences as per the list of likely charges or draft indictment that it is proposed will be provided to the judge (paragraph 106), or whether it would be sufficient for the company to agree a statement of facts and to neither admit nor deny the draft charges. The latter is likely to be more conducive to companies agreeing to deferred prosecution agreements 6

7 because the admission of specific criminal offences would bring into play the risk of discretionary debarment. Provision should be made as to prosecution costs. 11 Do you agree that there should be a reduction principle, relating only to the financial penalty aspect of a DPA, and that the maximum reduction should be one third of the penalty that would have been imposed following conviction in a contest case? There should be a reduction principle applicable to the financial penalty aspect as otherwise companies could be worse off under deferred prosecution agreements than by proceeding to trial. We consider that the reduction should be greater than one third if the company has self-reported and borne the costs of its own investigation. The company's costs are likely to be significant because the company will have engaged external lawyers and forensic accountants to conduct an extensive internal investigation. If those costs are not taken into consideration by the court in determining the appropriate penalty, self-reporting and deferred prosecution agreements may become too expensive to be tenable for all but the largest companies. 12 Do you agree that it would be appropriate for the final stage of the DPA process to take place in open court? 13 Do you believe that it is right that the court should determine whether a variation to a DPA is appropriate, where a change of circumstances has occurred? 14 Do you believe that the prosecutor should be empowered to vary the terms of DPA, within limits defined within that DPA? Yes, but only with court sanction. 15 Do you believe that it should be possible for the parties to a DPA to be able to make amendments to it, within limits defined by that DPA? No. This would undermine the role of the court in the process. 16 Do you agree that there should be provision for formal breach proceedings and that it should be operated as described? We do not consider that a breach of a deferred prosecution agreement should amount to a stand alone criminal offence as there may be a variety of reasons for why the agreement could not be put into effect, for example, a change in the financial standing of the company. 17 Do you agree that judges should have discretion, following a breach, to insist that a DPA should be terminated? This would be consistent with the involvement of the judiciary in the process. 18 Do you agree that the proposals regarding admissibility are appropriate? On the basis that the deferred prosecution agreement would not be signed until approved by the judge, we agree with the approach as outlined. However, we consider the admissibility of the signed deferred prosecution agreement in a subsequent prosecution of the company (which presumably could only follow termination of 7

8 the agreement by the court for non-compliance) may be open to challenge. In the case of R v Allen [2001] UK HL 45 which was a case in which the House of Lords considered the admissibility of admissions given in "Hansard" interviews conducted by the Inland Revenue, Lord Hutton stated at paragraph 34: " If, in response to the Hansard statement, the appellant had given true and accurate information which disclosed that he had earlier cheated the revenue and had then been prosecuted for that earlier dishonesty, he would have had a strong argument that the criminal proceedings were unfair and even stronger argument that the Crown should not rely on evidence of his admission " 19 What are your views on the appropriate approach to disclosure in the context of DPAs? We agree with the approach as outlined. 20 Do you agree with our proposals regarding the susceptibility to judicial reviews of decisions made in relation to DPAs as outlined above? 21 Do you agree that DPAs should be available in relation to conduct which took place before the commencement of any legislative provisions introducing them? That is essential as often it is historic conduct that companies uncover as a result of an acquisition, disposal, restructuring or some other enquiries. It would be unworkable for a company to be able to self-report conduct which post dated the commencement of the legislative provisions and obtain a deferred prosecution agreement in respect of that conduct, but not to have that option available in respect of earlier conduct. It would potentially undermine the completeness of disclosures. 22 Do you agree with the proposed process for DPAS, as outlined in this chapter, and do you have any suggestions for the improvements or amendments to it which would support the overall policy objectives? We agree with the proposals. 23 Do you have any further comments in relation to the subject of this policy consultation? As British companies operate across the UK and internationally, it is important that the Ministry of Justice engages with the devolved regimes on a UK wide application of deferred prosecution agreements, and with the US and EU countries on the issues of primacy of jurisdiction and double jeopardy. It would also be an opportune time to revisit the UK/US extradition treaty. The risk of directors being extradited to the US weighs heavily in any decision to self-report. 24 Do you have any comments in relation to our impact assessment? The Impact Assessment sets out the following options as alternatives to regulations: Option 0- do nothing; and Option 1: deferred prosecution agreements. There is a third option which would be to greatly increase the funding of the fight against economic crime. The reduction in the Serious Fraud Office's budget does not sit with the Government's stated aim of tackling economic crime. These options should not be looked at as mutually exclusive. There is a case for the introduction of deferred prosecution agreements and an increase in the Serious Fraud Office's budget. With regard to the assumptions made in respect of the likely number, length and costs of deferred prosecution agreements, we would comment as follows: 8

9 1. Number of cases - no account has been taken of the fact that companies are more likely to self-report if deferred prosecution agreements are introduced. We consider that there will be an increase in the stock of corporate cases that the Serious Fraud Office and Crown Prosecution Service will need to deal with. 2. Length of cases - we disagree that the investigation and "discuss terms" stages will take the same amount of time as the existing co-operative criminal route for early guilty pleas. Due to the reputational damage caused by criminal pleas, a great deal of time is taken up considering the weight and admissibility of evidence, and in negotiating the terms of a plea. The certainty created by deferred prosecution agreements will incentivise a quicker resolution and less defence and prosecution time will be taken up wrangling over evidential issues and technical challenges. In addition, companies are more likely to carry out internal investigations themselves and to provide the authorities with a report and supporting evidence to justify a deferred prosecution agreement. 25 Could you provide any evidence or sources of information that will help us to understand and assess those impacts further? No. 26 What do you consider to be the positive or negative equality impacts of the proposals? We consider that treating companies and individuals differently is justified for the reasons set out in answer to question 1. To avoid negative equality impacts with respect of individual offenders, prosecutions of individuals who perpetrate economic crimes needs to be prioritised and properly resourced. To guard against deferred prosecution agreements becoming the domain of large international companies and unaffordable for smaller companies, prosecutors need to take a proportionate approach to level of investigation that companies require to undertake and to the use of monitors. 27 Could you provide any evidence or sources of information that will help us to understand and assess those impacts? No. 28 Do you have any suggestions on how potential adverse equality impacts could be mitigated? As set out in the answer to question 26. Tom Stocker Partner For Pinsent Masons LLP 9 August