Global Investigations Review - The law and practice of international investigations

The Practitioner’s Guide to Global Investigations

Negotiating Global Settlements: The UK Perspective

04 January 2017

Herbert Smith Freehills

Cloth Fair Chambers

21.1       Introduction

This chapter discusses the three main options that corporates typically consider when they are seeking to settle criminal and related proceedings in England and Wales – negotiated plea agreements, civil recovery orders (CROs) and, as of 24 February 2014, deferred prosecution agreements (DPAs).

Central to any consideration of criminal settlements in England and Wales is the identification principle under the common law, which defines the scope of corporate criminal liability. The principle states that the ‘acts and state of mind’ of only those who represent the ‘directing mind and will’ of the corporate will be imputed to it.1 The application of this principle is generally restricted to the actions of the board of directors, the managing director and other senior officers carrying out managerial functions and acting and speaking as the corporate.2 Historically, the identification principle has made it very difficult for authorities in the United Kingdom to convict corporates of any significant size. The English courts have, in certain situations, applied this rule of attribution to persons outside the board level, but this will depend on the construction of the particular offence in question.3 This relatively narrow position should be contrasted with that in the United States, where corporates may be vicariously liable for the acts of their employees. This difference in the probability of a successful prosecution explains, in part, why settlement agreements are far more prevalent in the United States than in the United Kingdom.

The statutory landscape in the United Kingdom is changing to make the prosecution of corporates easier for authorities. Section 7 of the Bribery Act 2010 created criminal liability for corporates who fail to prevent ‘associated persons’ (potentially including agents, subsidiaries, and other third parties as well as employees) from committing bribery. The UK government has proposed a similar offence of failure to prevent tax evasion; under the current draft of the offence, prosecutors will need to prove that tax evasion has occurred, that a person facilitated this evasion and that the facilitator was a person associated with the accused corporate. This type of offence of failure to prevent may become increasingly common; the current Director of the SFO has called on a number of occasions for the failure to prevent offence to apply to all financial and economic crimes and in May 2016 the Ministry of Justice announced that it would be consulting on the introduction of such an offence. The heightened threat of a successful prosecution may lead to an increase in the prevalence of settlements of criminal proceedings in England and Wales.

Each option for settlement available to a corporate has its own particular advantages and disadvantages, but a common feature is that they are all jurisdictionally limited in their effect to the United Kingdom. Where there are multiple investigating authorities, settlement negotiations in the United Kingdom will typically be approached as part of a larger, overarching strategy to settle current and prospective proceedings globally.

UK authorities are increasingly participating in global settlements, particularly with their US counterparts. It may yet be too early to identify any trends, although one distinct feature has emerged: the central role of the UK judiciary. The Innospec settlement was criticised by the senior judge who heard the case, Thomas LJ, for being presented as a ‘done deal’,4 and the DPA model introduced in the United Kingdom departs significantly from its US counterpart by being conditional on substantial judicial review and approval.5

Until the recent case of SFO v. XYZ Limited,6 a further feature of settlements concluded by the UK authorities appeared to be that they were more likely to be successful if the criminal conduct had been contained to an isolated incident. For example, the Balfour Beatty plc settlement (which resulted in the first CRO against a corporate in the United Kingdom) related to one particular contract.7 The first DPA in the United Kingdom, involving Standard Bank plc (now ICBC Standard Bank plc ‘Standard Bank’), concerned a particular debt transaction.8 XYZ Ltd involved an SME that generated the majority of its revenue via sales to Asian markets, through the systematic offer and payment of bribes to secure contracts in a number of foreign jurisdictions over the course of roughly eight years.9 This conduct could not be said to be contained, involving as it did at least 28 separate contracts, although the misconduct was alleged to have been carried out by a small number of employees.

Corporates facing proceedings in more than one jurisdiction could seek to settle each set of proceedings individually, but the idea behind a global settlement is to coordinate these negotiations. In theory, a global settlement should be a ‘win-win’ scenario for both the corporate and the investigating authorities. By acting in concert, the investigating authorities are able to exert more pressure on the corporate to settle than they each are likely to have been able to do in isolation. For the corporate, a global settlement is potentially a fairer outcome as the penalty will be assessed holistically. A global settlement also achieves more finality than a domestic prosecution, which confers only limited double jeopardy protection (in those jurisdictions where such protection is granted).

In practice, global settlements can involve significant risks. As recently demonstrated by the pending Greek prosecution of former Johnson & Johnson employees, which includes the prosecution of one individual, Robert Dougall, notwithstanding his 2010 prosecution by the SFO and conviction and sentence,10 no settlement can confer an absolute guarantee against further proceedings in any jurisdiction – particularly not in jurisdictions where there is no limitation period for criminal offences (as in the United Kingdom, other than for summary offences). Dougall’s fate must be contrasted with the outcome of the SFO’s investigation of Johnson & Johnson’s UK subsidiary, DePuy International Limited (DePuy), which was investigated by the SFO following a referral from the United States Department of Justice (DOJ); which, along with other domestic and foreign authorities, had been investigating Johnson & Johnson in relation to payments made by DePuy to intermediaries for the purpose of making corrupt payments to Greek medical professionals working in the Greek public health system.11 The DOJ concluded a DPA with Johnson & Johnson in the United States as part of a global settlement over the unlawful conduct in Greece.

The SFO sought a CRO against DePuy rather that pursuing any criminal prosecution on the basis that such prosecution was prevented in the United Kingdom by the principle of double jeopardy. The Director of the SFO took the view that the underlying purpose of the rule against double jeopardy is to stop a defendant from being prosecuted twice for the same offence in different jurisdictions: Johnson & Johnson’s DPA with the DOJ had the legal character of a formally concluded prosecution and punished the same conduct in Greece that had been investigated by the SFO. That double jeopardy will be a bar to prosecution where a defendant has been convicted or acquitted by a foreign court on the same facts is uncontroversial,12 but whether the conclusion of a DPA in the United States is equivalent to a formally concluded prosecution has not been tested in the courts. The SFO gave no detailed argument as to why it concluded that DePuy’s prosecution in the United Kingdom was barred, and the application of the principles of double jeopardy in global settlements remains unclear.13 The SFO’s reasoning in relation to DePuy will also be problematic where as part of a global settlement it is seeking to agree its own DPA in the United Kingdom following their introduction in 2014. If the SFO considers itself prevented by the rules of double jeopardy from pursuing criminal prosecution against a corporate that has agreed a DPA or other settlement with foreign authorities, then it may be prevented from agreeing a DPA under the statutory regime in the United Kingdom as prosecution may always follow a DPA if its terms are breached.14

Furthermore, no settlement can prevent private civil litigation, which could potentially be assisted or even encouraged by material generated in connection with the settled proceedings. However, settlement could make civil action less likely (or at least less likely to be successful), than were a contested criminal trial to take place, by reducing the volume of material entering into the public domain as compared to a full trial of the facts.

Whether a global settlement is worth pursuing is therefore likely to depend very much on the circumstances of each case. A key consideration will be the jurisdictions and agencies involved, and the particular form or forms of settlement contemplated.

21.2       Initial considerations

This chapter assumes that the corporate has already decided that a settlement is desirable in principle. This is not a straightforward exercise and will involve many of the considerations discussed in the other chapters in this book. This is likely to include a comparison of the cost involved of agreeing a settlement (and any agreed financial penalty) as against the cost involved of defending criminal proceedings and the probability of a conviction (and any penalty imposed). It will also include the reputational damage that contested criminal proceedings may have on a corporate. Corporates should also consider that a criminal conviction for certain economic and financial crimes may exclude them from competing for certain public contracts.15

Of course a corporate may also successfully argue that the authority should not institute any proceedings against it: prosecutors must be satisfied of the evidential basis of the prosecution as well as the public interest in prosecuting.16 Many investigations in the United Kingdom result in no further action being taken against the subject of the investigation.

The attractiveness of a settlement is likely to vary considerably depending on the conduct under investigation and the investigating authorities involved. It is also likely to depend on the form of settlement available – for example, the advantages to a corporate of agreeing to a DPA in the United Kingdom are likely to be very far removed from the advantages of agreeing to a DPA in the United States. In some circumstances a settlement in the United Kingdom might not be an attractive prospect when considered in isolation, but the ability to secure a linked settlement with investigating authorities in another jurisdiction could tip the balance in favour of seeking a UK settlement as part of a global resolution.

Given that a settlement may not always be an obvious choice, the reasons for seeking to settle and the reasons for choosing a particular form of settlement should be clear before negotiations commence. The initial assessment of the corporate’s eligibility for the kind of settlement sought must be realistic, based on the best available information about the conduct and a thorough understanding of the attitude and approach adopted by the relevant authorities. The corporate will also need to be clear about the risks that settlement negotiations entail. In the event that the negotiations break down, the corporate might find itself in a worse position than it would have been in had it not entered into the negotiations in the first place. Finally, to demonstrate compliance with fiduciary obligations it will also be important to ensure that any decision-makers have no personal interest in the outcome of settlement negotiations, as they would have if they were exposed to individual liability in connection with the conduct under investigation. This may be particularly complex in relation to small corporates where any decision-makers face individual liability for criminal conduct while simultaneously attracting liability to the corporate by acting as the directing mind and will.

21.2.1    Options for seeking a settlement in the United Kingdom

21.2.1.1  Civil recovery orders

A corporate could seek to persuade an investigating authority to dispose of an investigation by initiating civil recovery proceedings rather than a prosecution. This decision is not subject to judicial approval, as the decision on whether to prosecute rests solely with the prosecutor.

Civil recovery proceedings can be brought in the High Court by a number of UK enforcement agencies against property of a value in excess of £10,000 believed to have been obtained through unlawful conduct.17 As a form of settling criminal proceedings a CRO has many features that could be helpful when a UK settlement is sought as one aspect of a global settlement. No prior UK conviction is required. The standard of proof is the civil one of the balance of probabilities. Judicial approval does not need to be sought before a claim can be brought, and the High Court’s jurisdiction to make the order extends over assets located overseas; although it may in practice be tempered by the local law position on enforcement of non-conviction based orders.

A CRO was for many years regarded as the best possible settlement outcome for corporates facing potential criminal proceedings in the United Kingdom, and an outcome that could plausibly be expected in a corporate self-reporting case. Two developments have impacted on this view.

First, under its current policy, the SFO will be less ready than it historically has been to dispose of an investigation by way of a CRO.18 In part, this is a response to the OECD’s criticisms of the UK’s lack of commitment to combating bribery of foreign public officials.19 In the event that the SFO were to agree to a CRO, its terms will now be published in full, which removes some of the historically perceived benefit of this form of settlement.20

Secondly, the SFO has demonstrated that civil recovery proceedings and criminal proceedings are not necessarily mutually exclusive provided that the conduct can be divided. In conjunction with the conviction of Bruce Hall in 2012 and the making of a confiscation order and compensation order against him, the SFO brought civil recovery proceedings in respect of conduct falling outside the scope of the indictment because UK jurisdiction did not arise.21 This has to be considered, however, against the background of the criticism by Thomas LJ in Innospec of the use of a CRO in addition to trial on indictment; Thomas LJ concluded that where the facts and public interest determined that a prosecution was appropriate, the use of the civil jurisdiction was consequently inappropriate. In particular, the judge deprecated the possibility of matters arising in the same case coming within the jurisdiction of two separate judges from two separate courts. In contrast, the use of a CRO for DePuy was less problematic as the corporate was not the subject of an indictment.22

21.2.1.2  Deferred prosecution agreements

A DPA may be regarded as the half-way house between a negotiated plea agreement and a CRO. It remains to be seen whether it will be a popular form of settlement or whether it will be confined to isolated instances. First, a DPA is only available in limited circumstances. Secondly, the power to apply to the courts for a DPA rests solely with the prosecutor,23 and the DPA provisions reserve to the prosecutor (currently only the SFO or the Crown Prosecution Service) the right to extend any invitation to enter into DPA negotiations. Thirdly, as has been identified by the Director of the SFO,24 the high threshold for corporate criminal liability under English law reduces the incentive for corporates to enter into a DPA at all. To date, the two DPAs secured in the United Kingdom have not faced any difficult application of corporate criminal liability: Standard Bank plc related to the strict liability offence of failing to prevent bribery under section 7 of the Bribery Act 2010; XYZ Ltd applied to a small company in which the directing mind and will was easily identified. Experience will demonstrate to what extent a corporate entity can introduce the possibility of a DPA into any discussions it may hold with the SFO.25

In theory, a DPA should be an attractive form of settlement as the corporate is never actually prosecuted, avoiding the stigma and adverse publicity necessarily associated with a criminal trial and a conviction. A corporate will have the opportunity to make representations on and to influence the terms of the settlement that is made public, and there will be no mandatory debarment from public contracts. Importantly, a DPA may be part of a global resolution that may be in the overall commercial interests of the corporate.

The corporate is nevertheless the subject of criminal proceedings that are suspended. The offences alleged to have been committed are particularised in an indictment, and further detailed in the statement of facts accompanying the DPA. The terms of the DPA will include not only a penalty intended to reflect the penalty that would have been imposed on a guilty plea but also disgorgement of profits and potentially compensation payments.

The terms of the DPA may require the corporate to disgorge the gross profit made as a result of the criminal conduct.26 The DPA may also impose a financial penalty, 27 which must be broadly comparable to the fine that a court would have imposed on conviction and is accordingly assessed by reference to the relevant Sentencing Guideline for fraud, bribery and money laundering offences (Sentencing Guideline).28 Where the corporate has limited means and ability to meet these financial obligations, the court may nevertheless approve a penalty that would render the corporate insolvent where it would be in the interests of justice to do so.29 Among other things, the court will consider the impact of any financial penalty on the corporate’s staff, service users, customers and the local economy. In XYZ Ltd, the corporate’s parent agreed to provide financial support to XYZ Ltd by returning almost £2 million from dividends received for XYZ Ltd to pay towards disgorgement.30 The court made clear that the innocent parent was under no contractual or legal obligation to contribute towards the financial penalty imposed on its subsidiary for the criminal conduct.31 However, the court did point out that the parent had received £6 milion in dividend payments since acquiring XYZ Ltd. Unlike a criminal sentence, a DPA may extend to requiring the corporate to submit to a compliance monitor for a specified period.32

The process of negotiating a DPA could itself deter a corporate from seeking this sort of settlement. It is lengthy and uncertain, as any agreement reached with the relevant prosecuting authority is ultimately conditional on judicial approval. It is accompanied by potentially as great a degree of public scrutiny as may be attracted by contested criminal proceedings. The provision of false, misleading or incomplete information to the relevant prosecuting authority could amount to an offence,33 and it can be extremely challenging for a corporate, and the relevant individual within the management structure, to certify that the material provided to the investigating agency is complete.

The DPA may become a more attractive option for corporates if there is more flexibility in the terms imposed; the Director of the SFO has recently noted that the US Department of Justice Pilot Program, under which a 50 per cent discount on penalty is available to corporates voluntarily self-disclosing FCPA violations, was of obvious interest to the SFO.34 In the DPA reached with XYZ Ltd, the court stated that a discount of 50 per cent to the financial penalty that would have been imposed35 could be appropriate given that the corporate had self-reported and admitted the criminal conduct far in advance of the earliest possible opportunity, that would have applied after a criminal charge.36 This sizeable reduction was not based on an application of the Sentencing Guideline or the DPA statutory provisions themselves.

There is a clear view among practitioners that the incentives to enter into a DPA, in particular the apparent maximum discount on penalty, embedded within the statutory scheme,37 of one-third (the same as for an early guilty plea) is insufficient and fails to recognise the positive factors in the conduct of the corporate that will have led to the offer of a DPA in the first place. It may be that both the SFO and the judiciary have recognised this in the light of reference to a 50 per cent discount to the financial penalty that could have been imposed in XYZ Ltd.

21.2.1.3  Negotiated plea agreements

A plea agreement can be negotiated with the prosecutor at any stage after indictment, up to the conclusion of the trial. It may be preceded by advance representations on charge, which a prosecutor is under no obligation to consider but may do so at his or her discretion. Both advance representations and plea agreements could potentially reduce the scope of the conduct charged, or even determine the nature of the offence charged; as seen in BAE Systems,38 where the corporate had been investigated for overseas corruption but pleaded guilty to knowingly procuring the failure of their subsidiary, British Aerospace Defence Systems Ltd (BADS), to comply with the provisions of section 221 of the Companies Act 1985, and thereby [aiding and abetting, counselling and procuring] the commission of the offence contrary to section 225 of the Companies Act by the officers of BADS.39 In BAE Systems, Mr Justice Bean was critical of the restriction on the scope of the conduct in the settlement reached between the corporate and the SFO, and in light of these criticisms prosecuting authorities may in future be less willing to minimise the conduct in negotiated plea agreements.40 Mr Justice Bean made clear that in cases involving negotiated plea agreements the judge will not be bound by the agreement between the prosecution and the defence, and the prosecution’s view on the proposed basis of the plea is deemed to be conditional on the judge’s acceptance of the basis of the plea.41 The judge made clear that the involvement of the criminal courts precludes the passing of a sentence on an artificial basis. While the Mr Justice Bean accepted the basis of the sentence in BAE Systems, this may not always be the case.42

The judge also expressed surprise that the SFO had committed to a blanket indemnity against investigations or prosecutions of any member of the BAE Systems group for past conduct whether disclosed or otherwise.43

However, even if the charges remain unchanged, a guilty plea at the earliest possible stage makes the corporate eligible for a reduction of up to one-third off the sentence that would otherwise have been imposed on conviction.44

UK prosecutors will always be open to negotiations on plea. The prosecution and the defence are in all cases required to resolve issues and agree evidence wherever possible prior to trial.45 The prosecutor must however have regard to any applicable restraints on the exercise of discretion, including the Witness Charter and the Code of Practice for Victims of Crime.46 In accordance with the Code for Crown Prosecutors, prosecutors will also need to ensure that the plea reflects the seriousness and extent of the offending.47 The Attorney General’s Guidelines to the legal profession state that prosecutors must not agree to a basis of plea that is misleading, untrue or illogical or insupportable.48 Where a case involves multiple defendants, the bases of plea must be factually consistent. Trial judges may ultimately, of their own motion, disregard the agreement and direct a ‘Newton’ hearing to establish the relevant facts.49

Just as the decision on whether to accept a proposed basis of plea is ultimately one for the trial court, it is similarly for the sentencing court to impose the sentence on conviction. In cases of serious and complex fraud the Attorney General’s Guidelines permit the prosecution and defence to present a joint written submission to the court on sentence but this is not binding on the court. In Dougall, the court declined to impose the SFO’s suggested suspended sentence on an assisting offender, although the custodial sentence that the court did impose was overturned on appeal. The Court of Appeal criticised the SFO for adopting a role that was more akin to that of the defence. The courts in BAE Systems and in Innospec felt compelled to accept the suggested sentences because they formed part of a global settlement that the corporate entity had been invited to accept, but Thomas LJ in Innospec warned that this approach would not be repeated in the future.

The attractiveness of a plea agreement to a corporate will depend largely on the weight of the prosecution evidence, including the existence of any co-operating co-offenders under the ‘offender assistance’ provisions set out in sections 71-75 of the Serious Organised Crime and Police Act 2005. In particular, the corporate’s willingness to plead is likely to reflect an assessment that the prosecutor would be able to establish corporate criminal liability. As mentioned in the introduction to this chapter, guilty pleas by corporates are more likely to be forthcoming for offences where the identification principle does not apply or liability is strict, or both, or where the corporate is small and lines of responsibility are clear; by contrast, the prosecution might in other cases struggle to identify culpable senior management.

The size of the likely penalty will also be a factor when the corporate is considering whether to plead. There is an established procedure in place by which a defendant in Crown Court proceedings can seek a binding indication from the trial judge of what sentence would be imposed on a guilty plea (Goodyear indication).50 That new Guideline may have similarly increased the attractiveness of plea agreements for corporates, not only by making the likely sentence more predictable at an even earlier (pretrial) stage but also by increasing the risk of higher penalties being imposed than has historically been the case and thereby incentivising an early, negotiated settlement.

The downsides of a plea agreement include the inability to contest the charges in a public forum, and loss of the opportunity of an acquittal. The advantages of a plea agreement also decline rapidly with time once a trial is under way.

There are also risks arising from plea negotiations. The Attorney General’s Guidelines state that the prosecutor may not rely on the defendant’s participation in plea negotiations or on any information disclosed during those negotiations as evidence against the defendant in the event that the negotiations fail but a signed plea agreement can be relied on as confession evidence against the defendant. A prosecutor would normally be free to rely on any evidence gathered as a result of enquiries made on the back of information disclosed in the course of the negotiations, and information provided by the defendant in connection with the negotiations could normally be relied on both in related prosecutions of other defendants and in a prosecution of the defendant for another offence. In addition, the prosecutor might be obliged to disclose material relevant to the negotiations to a co-defendant.

21.2.2    Strategic considerations when seeking a settlement in the United Kingdom

Once a corporate has decided in principle to seek to settle criminal proceedings in the United Kingdom, the objective will be to achieve the desired form of settlement as effectively as possible, avoiding or minimising, to the extent possible, adverse consequences. This section will discuss common strategic considerations that are likely to arise at the outset and during the early stages of settlement negotiations.

21.2.2.1  Timing of settlement

A preliminary strategic consideration will be the point at which to approach the relevant authority. On the one hand, a successful outcome is more likely the earlier an approach is made. The financial and reputational costs to a corporate of being a subject of a criminal investigation and prosecution will increase incrementally and early self-reporting is an important factor in determining whether a DPA will be offered. Clearly, however, the corporate needs to have sufficient knowledge about the conduct it proposes to report.

A corporate may self-report the conduct in question or otherwise bring it to the attention of relevant authorities, for example, pursuant to money laundering reporting obligations or, for listed corporations, obligations to disclose information to the market. The SFO’s most recent guidance on self-reporting was published in 2012.51

In all other cases the determining factor is likely to be the type of settlement sought. Where the favoured outcome is a CRO, the driver will be to reach agreement on this form of alternative disposal before any steps are taken to initiate criminal proceedings. If the preferred form of settlement is a DPA, the timing of the settlement will be dictated by the DPA Code of Practice,52 but again will involve negotiations with the authority before the commencement of criminal proceedings. A settlement could be reached at any of the following points in time.

Before major production of documents

A corporate must balance the need to understand any potential criminal liability it faces with the benefit of making an early report to an authority. As stated above, corporates should establish sufficient knowledge of the circumstances before deciding to seek a settlement. Once that decision has been made, it is unlikely that an agency in the United Kingdom will be prepared to reach a settlement agreement without receiving all relevant documentation and undertaking some form of investigation. Once in the hands of the authorities, any material provided could be used against the corporate and/or individuals. In addition, such material can be provided to other domestic and/or international agencies and may ultimately be disclosed in any related civil proceedings. It has to be assumed that documents provided to investigating agencies may ultimately end up in the public domain.

Before witness testimony

Corporates will record any interviews they conduct, and UK authorities are likely to want access to these first accounts, which may raise issues of legal professional privilege. A corporate could choose to rely on documentary evidence to gain an understanding of any potential liability and so avoid the time, expense and privilege difficulties associated with conducting lengthy interviews. However, in many circumstances it will be necessary to conduct interviews in order to obtain an understanding of the facts. Very often in the United Kingdom the SFO will conduct interviews as part of its investigations following a self-report, including where there have already been interviews by the corporate.

Before indictment

In most cases, corporates will be seeking to settle before indictment. As discussed above, settlement negotiations may provide an opportunity to influence the content and timing of the indictment.

Before trial

A settlement at the early stages of criminal proceedings may help to mitigate reputational damage by reducing the amount of material made available to the authorities and, through them, potentially becoming available in the public domain or to other overseas agencies.

There may yet be benefits of settling after the commencement of trial. Although disclosure obligations will have been complied with and material may have been referred to in open court (thereby becoming accessible to the public), by avoiding witness testimony the corporate may minimise the risk of further reputational and other costs as a result of adverse prosecution testimony or unpredictable defence witnesses. Settling before conviction could potentially also serve a public relations objective in presenting the corporate publicly as being somewhat co-operative (despite initially contesting the proceedings).

21.2.2.2  Ability to secure a global settlement

An early settlement of UK criminal proceedings may also increase the prospects of concluding a global settlement. In the global settlement scenario, timing is likely to be primarily driven by the authority ‘leading’ the settlement negotiations. As press reports suggested in relation to the LIBOR investigation, there can be a ‘race’ among investigating authorities to charge defendants as a means of securing jurisdiction.53

Where a number of authorities may be investigating or have an interest in investigating the conduct, the potential for conflicts of jurisdiction to arise should be addressed by communications between prosecutors pursuant to multilateral and bilateral agreements such as the Eurojust guidelines for deciding which jurisdiction should prosecute and the Agreement for Handling Criminal Cases with Concurrent Jurisdiction between the United Kingdom and the United States of America.54 Prosecutors engaged in plea negotiations in serious and complex fraud cases are directed by the Attorney General’s Guidelines to liaise with any counterparts known to have an interest in the defendant, in accordance with the Prosecutors’ Convention and any other relevant agreement or guidance.55 However, these arrangements would not be enforceable by corporates who find themselves adversely affected by any departures from their terms; in any event, such agreements do not tend to address settlements.

In practice, constructive global settlement discussions require a high level of communication between the investigating agencies involved and also between the lawyers acting for the corporate and those investigating agencies. By way of example, in Standard Bank plc there was clearly a high level of communication between the SFO and the US DOJ (as well as between the bank’s lawyers and both the SFO and the DOJ), which ultimately resulted in the DOJ confirming in writing in advance of the UK settlement that in view of the terms of the proposed settlement it did not propose to continue its own investigation.

The SEC, on the other hand, decided to continue with its own investigation into the civil (as opposed to criminal) consequences of the alleged conduct, which resulted in a separate settlement with the bank. Although the SEC’s investigation related to separate issues, the bank completed its settlement with the SEC very shortly before the final DPA hearing in the United Kingdom and the settlement was announced on the same day. Coordinating the timing of the settlement so that it was announced at the same time was clearly in the bank’s interests, as it ensured that the UK and US investigations into the conduct were resolved simultaneously with the bank able then to draw a line under the events and focus on the future.

It is important to keep in mind when negotiating simultaneous settlements with multiple authorities and regulators (both at home and abroad) that the subject ensures that the published findings in each investigation concluded by a negotiated settlement are consistent, as authorities may have an incomplete understanding, or different interpretation, of the facts.

21.2.3    Written submissions to UK prosecuting authorities

One important risk that settlement negotiations pose for corporates is that the material generated will be relied on in the event that the negotiations break down; whether by the recipient authority or by third parties. Even if settlement negotiations will attract confidentiality to varying degrees, there will always be a number of avenues through which material provided to the authorities may be made available to other authorities and to third parties.

The extent to which settlement negotiations will generate material, and the extent to which such material may be protected from onwards disclosure, will depend on the form of settlement in question. Written submissions made to a prosecutor in the course of negotiating a plea agreement are confidential and will only be made available to third parties where it can be shown that the prosecutor’s obligation to preserve confidentiality is outweighed by a countervailing interest.56 In DPA negotiations, both the form and content of documents are governed by statute and are not negotiable. These documents will include the draft statement of facts and the terms of the proposed DPA, as well as the preliminary application to the court.57 The prosecutor will require these documents to be agreed before the application to the court can proceed. They will also include any submissions contained in related correspondence with the prosecutor, as well as minutes of any meetings between the corporate and the prosecuting authority.

21.2.4    Oral presentations to UK prosecuting authorities

Presenting information orally, as an alternative to written submissions, could in theory reduce the risk that settlement negotiations pose for corporates by limiting the amount of incriminating documentary material generated in the course of settlement negotiations or otherwise provided to the authorities. As a strategy it is obviously conditional on securing the agreement of the prosecuting authority, and is not as frequently encountered in the United Kingdom as in the United States; but the SFO is known to have acceded to requests of this nature on occasion. Notably, this approach was employed in relation to both the first and second DPAs entered into in the United Kingdom. However, it is not clear to what extent oral presentations will ultimately put the corporate in a better position than it otherwise would have been in had it made written submissions instead. Oral summaries of privileged information and material could still be considered by the prosecuting authority as a limited (or indeed full) waiver of privilege, as there is no settled case law in the United Kingdom on this point, which could create a risk of collateral waiver of privilege in other jurisdictions or over other material. If the underlying interviews were not privileged, a prosecutor’s notes from the presentation could potentially be disclosed to third parties, without the corporate having an opportunity to confirm whether the impressions recorded are correct.

An indication of the possible approach of courts in the United Kingdom can be gleaned from a ruling in proceedings against Dennis Kerrison and Miltiades Papachristos (employees of Innospec) (13 May 2013 unreported) in which His Honour Judge Goymer considered whether a PowerPoint presentation to the SFO/DOJ that referred to the notes of interviews conducted by the corporate with a prosecution witness amounted to a waiver of legal professional privilege in those interviews. The judge decided that there was not sufficient deployment of the interview notes in the PowerPoint presentation such as would amount to a collateral waiver of legal professional privilege in respect of those notes. It was conceded in argument that the PowerPoint presentation was subject to privilege, and as such there was no detailed discussion of the application of the principles of litigation privilege in this case. This is not always so in the investigations context, following Three Rivers District Council and Others v. The Governor and Company of the Bank of England 2003 EWCA Civ 474 (Three Rivers No. 5). The Court of Appeal has considered more recently the ambit of litigation privilege in one of the many cases relating to the SFO’s investigation into the Tchenguiz brothers, stressing the importance of the ‘dominant purpose’ test.58 (See also Chapter 31 on privilege.)

21.3       Legal considerations

Settlement negotiations should only be undertaken with a thorough understanding of the legal framework that governs the particular form of settlement pursued, and any relevant policies that govern the approach adopted by the relevant prosecuting authority. A number of relevant legal principles will also need to be borne in mind as crucial background context, regardless of the form of settlement pursued.

21.3.1    Legal professional privilege (LPP)

Prosecuting authorities are increasingly requesting or encouraging corporates to waive privilege as a sign of their co-operation, or even as a precondition to concluding a settlement. The extent to which the prosecuting authority and a corporate may diverge in their interpretations or application of LPP is dealt with in Chapter 31 but the appropriateness of putting pressure on a corporate to waive LPP is far from clear; particularly in the context of a multi-jurisdictional investigation where a number of different legal systems may be in play, all with varying degrees of protection for lawyer–client communications. The collateral damage to the corporate’s interests in other jurisdictions if LPP were to be waived could potentially be substantial, and would need to be carefully considered before the corporate agreed to a global settlement involving a waiver on this basis. Attempts to resolve these difficulties by offering limited waiver may work in practice but are not without risk.

21.3.2    Admissions

Unlike a plea agreement, the settlement of criminal proceedings by way of a CRO or DPA does not require the corporate to make formal admissions of guilt. However, the effect in practice of agreeing to a CRO or a DPA may be equivalent to an admission. An application for a CRO will be accompanied by a detailed statement of claim,59 and by agreeing to the CRO the defendant may be taken as confirming its agreement to the contents. Similarly, whereas an admission is not a prerequisite for a DPA, once the DPA is approved the statement of facts on which it is based becomes admissible in subsequent proceedings in England and Wales (not limited to related criminal proceedings) as if it were the corporate’s admission of its contents.

Indirect admissions of this kind entail risk for both the corporate and any other persons concerned in the conduct. They could potentially be relied on by third parties in support of civil or criminal proceedings brought against the corporate, both in the United Kingdom and overseas. They are also likely to prejudice the position of any other persons concerned in the conduct, not limited to the corporate’s officers. This exposure increases the more extensive the indirect admissions are. In negotiating the first UK DPA the SFO considered it necessary for the statement of facts to be lengthy (in this instance, 55 pages) to put the judge in a position to approve the agreement on the most complete basis available.

A corporate could seek to avoid or at least mitigate some of these adverse consequences by concluding a settlement under which a subsidiary accepts liability and makes any necessary admissions, as in the MW Kellogg Limited CRO in 2011.60 Note, however, that a corporate will not be able to hide behind a subsidiary that has been set up as a vehicle through which a corrupt payment may be made so that the subsidiary can be abandoned if the corrupt payment comes to light.61 Alternatively, a corporate could seek to negotiate a settlement under which an individual officer accepts liability instead of the corporate. However, if there is a prospect of a successful prosecution of the corporate entity, this may be unlikely to succeed. As a general matter, risk mitigation strategies of this kind are likely to be highly context-specific, and subject to the willingness of the relevant prosecuting authorities to recognise the interests at stake.

21.4       Practical issues arising from the negotiation of the first UK DPA

DPAs have to date been made available only for a limited range of corporate economic offences prosecuted by either the CPS or the SFO. Statute governs eligibility for a DPA, its contents and the manner in which it is to be negotiated and approved, with limited discretion left to either the corporate or the prosecuting authority. This departure from the much more flexible US model complicates any predictions as to how frequently DPAs will be relied on in practice in the United Kingdom, but this section will consider practical issues arising from the negotiation of the first UK DPA as part of a global settlement.

The legislation requires the judge hearing the application to be satisfied that a DPA is in the interests of justice (as opposed to prosecution of the corporate). The two DPAs agreed as at the time of writing, Standard Bank plc and XYZ Ltd were both heard by Sir Brian Leveson, President of the Queen’s Bench Division, who went to considerable lengths to satisfy himself that the proposed DPAs were in the interests of justice and that the terms were fair, reasonable and proportionate.

In the Standard Bank decision, Leveson P noted that the first consideration must be the seriousness of the conduct and in this regard emphasised that the potential criminality faced by the bank was the failure to prevent intended bribery committed by senior officers of a sister company. He also noted the SFO’s conclusion that there was insufficient evidence to suggest that any of Standard Bank’s employees had committed an offence.

Leveson P also attached considerable weight to the early report made by Standard Bank to the authorities, noted that the bank had made significant enhancements to its compliance policies and procedures since 2011 and that the bank in its form as at November 2015 was effectively a different entity from that which had been involved in the events the subject of the DPA. Notably, these two factors were also determinative in the DPA agreed between the SFO and XYZ Ltd.62

DPA negotiations are held under strict confidentiality restrictions imposed by the SFO pursuant to the DPA Code of Practice. The Code of Practice requires the corporate entering into DPA negotiations to provide an undertaking in respect of the confidentiality of the fact the DPA negotiations are taking place.

What this means in practice is that third parties with whom the corporate needs to share the fact of the negotiations or any information relating to the DPA negotiations must sign a confidentiality undertaking. Any potential disclosure to the market has to be carefully considered and discussed with the SFO at an early stage (i.e., prior to the relevant obligation arising), and with the judge once an application to the court has been made. Rule 5.8 Criminal Procedure Rules 2015 stipulates that details of a court hearing must appear on the court list at most 48 hours before the court hearing, and the listing must include the names of the parties. This in itself may give rise to press speculation on the subject matter of the DPA and the size of the financial penalty. If an announcement is required, an application should be made to the nominated judge.

The legislation does not address anonymity of individuals in the statement of facts. There are protections afforded in US DPAs and in the course of FCA investigations by the third-party rights provisions, and by the ‘Maxwellisation’ process in public inquiries. In Standard Bank plc, the conclusion reached was that those named on the draft indictment would be named as would be the bank’s senior deal team member but that the remaining individuals whose conduct was relevant to the factual narrative would remain anonymous. The potential consequences of the naming of individuals following the DPA’s publication can be seen in the fact that Ms Shose Sinare, one of the Tanzanian individuals allegedly responsible for the underlying offence in Standard Bank plc, has brought a civil claim against Standard Bank in the Tanzanian courts alleging, among other things, that she had a right to see and respond to the allegations in the statement of facts.

XYZ Ltd was anonymised on the basis that there were ongoing criminal proceedings arising out of the same facts; to avoid the risk of prejudice in those proceedings, the court ordered that the judgment providing full details of the parties involved only be made public following the conclusion of those proceedings.63 The statement of facts has not yet been published in this case for the same reason. XYZ Ltd was a small company and was charged with both substantive offences, requiring the application of the identification principle through the involvement of very senior former employees, and for the offence of failing to prevent bribery under the Bribery Act, which may have related to both agents and employees.64 The XYZ Ltd case, once published in full, may shed further light on how individuals will be treated when a global settlement with a corporate is being negotiated.

The negotiation process in Standard Bank plc did not move as quickly as originally anticipated. It became apparent that an adversarial stance would not be appropriate in seeking to negotiate an agreement, and over time communications became more focused and more effective. It is also clear from the facts available that XYZ Ltd took a considerable period to resolve; so, while the process towards a DPA is likely to be shorter than a contested trial, it will probably still take a considerable period to agree and be approved.

Before the preliminary application is filed at court by the SFO, the corporate is required to provide a declaration regarding the information supplied to the SFO, as well as the declaration of the individual through whom the corporate made its declaration. The declarations are required to be made pursuant to the Criminal Procedure Rules 2015.65

To provide comfort to the corporate and the individual it may be necessary to follow a similar process to that used when individuals sign regulatory attestations – including understanding the documentation provided and questioning those involved in the data collection process. This is something to consider as early as possible in the DPA negotiations.

It is also clearly important to seek to ensure that the scope of any compliance review or monitorship is limited to the matters that are relevant to the circumstances of the case, as these can be intrusive, lengthy and costly exercises.

In global investigations and settlement discussions it is essential to keep in close contact with other investigating agencies, where necessary providing detailed explanations of the DPA process and the basis on which the statement of facts and DPA terms have been agreed.

21.5       Resolving parallel investigations

In the UK, historically civil proceedings have generally been stayed pending the outcome of any parallel criminal proceedings although courts have considered this approach case by case. Specifically in the context of contemplated CROs, the current policy (set out in the Attorney General’s Guidelines on asset recovery)66 should prevent civil recovery proceedings from being pursued in parallel with criminal proceedings; although the Bruce Hall example discussed above demonstrates there is no bar against such proceedings being pursued in tandem with criminal proceedings provided the conduct that is the subject of the respective proceedings can be appropriately distinguished.67

21.5.1    Other domestic authorities

We have already identified some of the difficulties of negotiating a truly ‘global’ settlement and their inherent limitations; many of which are equally relevant where there are multiple domestic authorities investigating the same conduct and both civil and criminal proceedings are in contemplation. Corporates seeking to reach a settlement with other domestic authorities are likely to be assisted by agreements and MOUs already in place between the main authorities, including, for example, the memorandum of understanding between the Competition and Markets Authority and the SFO,68 and the FCA’s Enforcement Guide.69

21.5.2    Foreign authorities

The interplay of agencies becomes even more complex where foreign agencies are involved. The participation of UK authorities in global settlements has to date typically been driven by the US authorities, reflecting the relative ease with which US prosecutors can establish corporate criminal liability. One potential issue arises from divergent and sometimes conflicting requests from authorities, typically in connection with communications, disclosure of materials and confidentiality. The aim of any settlement negotiations should be to encourage one authority to take the lead, in accordance with any applicable guidelines or agreements concluded by the relevant authorities for this purpose.

Notes

  1. Lennards Carrying Co and Asiatic Petroleum [1915] AC 705, Bolton Engineering Co v. Graham [1957] 1 QB 159 (per Denning LJ) and R v. Andrews Weatherfoil 56 Cr App R 31 CA.
  2. Tesco Supermarkets Ltd v. Nattrass [1972] AC 153.
  3. Meridian Global Funds Management Asia Ltd v. Securities Commission [1995] 2 AC 500 PC.
  4. R v. Innospec Ltd, Crown Court (Southwark), 26 March 2010, at paras. 26-29 (Innospec).
  5. Section 45 and Paragraph 7, Schedule 17, Crime and Courts Act 2013 (UK).
  6. SFO v. XYZ Limited, Crown Court (Southwark), 11 July 2016 (XYZ Ltd).
  7. 'Balfour Beatty plc’, press release dated 6 October 2008, SFO.
  8. SFO v. Standard Bank plc (now ICBC Standard Bank Plc), Crown Court (Southwark), 30 November 2015 (Standard Bank plc).
  9. SFO v. XYZ Limited, Crown Court (Southwark), 24 June 2016, at paras. 6-7.
  10. R v. Dougall [2010] EWCA Crim 1048 (Dougall).
  11. ‘DePuy International Limited ordered to pay £4.829 million in Civil Recovery Order’, press release dated 8 April 2011, SFO.
  12. Treacy v. DPP [1971] AC 537 per Lord Diplock; see also the Decision of the Grand Chamber of the European Court of Justice in Kossowski (C-486/14, 29 June 2016), setting out the court’s views on double jeopardy and its operation across EU Member States.
  13. See the issue discussed in more detail in ‘Deterring and Punishing Corporate Bribery: An evaluation of UK corporate plea agreements and civil recovery in overseas bribery cases’, Transparency International UK policy paper published in May 2012, at paras. 353-361.
  14. Paragraph 9, Schedule 17, Crime and Courts Act 2013 (UK).
  15. Public Contracts Regulations 2015 (UK); Public Contracts Directive, 2014/24/EU.
  16. Crown Prosecution Service Guidance on Corporate Prosecutions, http://www.cps.gov.uk/legal/a_to_c/corporate_prosecutions/, accessed 6 July 2016.
  17. Part V, Proceeds of Crime Act 2002 (UK) (POCA). Section 316 of POCA defines ‘enforcement authority’ in England and Wales as the National Crime Agency, the Director of Public Prosecutions or the Director of the SFO. The financial threshold of £10,000 is set in section 287, POCA and the Proceeds of Crime Act 2002 (Financial Threshold for Civil Recovery) Order 2003 (UK).
  18. Guidance on Corporate self-reporting, issued by the SFO, revised in October 2012.
  19. ‘Report on the Application of the Convention on Combating of Foreign Public Officials in International Business Transactions and the 1997 Recommendations on Combating Bribery in International Business Transactions’, approved and adopted by the OECD Working Group on Bribery in International Business Transactions on 16 October 2008.
  20. Statement of David Green QC, Director of the SFO, 17 April 2013. See, e.g., ‘Oxford Publishing Ltd to pay almost £1.9 million as settlement after admitting unlawful conduct in its East African operations’, press release dated 3 July 2012, SFO.
  21. 'Bruce Hall sentenced to 16 months in prison’, press release dated 22 July 2014, SFO.
  22. See Section 21.1 above.
  23. See Paragraph 8, Schedule 17, Crime and Courts Act 2013 (UK).
  24. David Green QC, speech given at Pinsent Masons and Legal Week Regulatory Reform and Enforcement Conference, 24 October 2013.
  25. Deferred Prosecution Agreement Code of Practice, issued by the Director of Public Prosecutions and Director of the SFO (DPA Code of Practice), at para. 2.1.
  26. Paragraph 5(3)(d), Schedule 17, Crime and Courts Act 2013 (UK).
  27. Paragraph 5(3)(a), Schedule 17, Crime and Courts Act 2013 (UK).
  28. Fraud, bribery and money laundering offences: Definitive guideline, issued by the Sentencing Council, in force from 1 October 2014.
  29. XYZ Ltd Crown Court (Southwark), 11 July 2016 at paras. 23-24.
  30. XYZ Ltd Crown Court (Southwark), 11 July 2016 at para. 22.
  31. XYZ Ltd Crown Court (Southwark), 11 July 2016 at para. 21.
  32. See Schedule 17, Crime and Courts Act 2013 (UK).
  33. For example, for attempting to pervert the course of justice, contrary to the common law. Prosecution of the offence that is the subject of the DPA can also follow if the organisation provided information to the SFO that it knew or ought to have known was inaccurate, misleading or incomplete, see XYZ Ltd.
  34. David Green QC, speech given at Herbert Smith Freehills LLP’s Corporate Crime and Investigations Conference, 22 June 2016.
  35. In fact, as the judge made clear, the question of penalty was ‘academic because, given the amount disgorged, whatever multiplier is chosen and however substantial the discounts, the result is a figure which XYZ simply cannot pay and which would result in its insolvency.’ at para. 55.
  36. SFO v. XYZ Limited, Crown Court (Southwark), 24 June 2016, at paras. 55-57.
  37. Schedule 17 Paragraph 5(4), Crown and Courts Act 2013 (UK).
  38. R v. BAE Systems plc [2010] EW Misc 16 (CC) (BAE Systems).
  39. Corruption and Misuse of Public Office (2nd Ed.), Collin Nichols QC, Timothy Daniel, Alan Bacarese and John Hatchard, at p. 39.
  40. BAE Systems at para. 13.
  41. R v. Underwood [2004] EWCA Crim 2256; BAE Systems at para. 13.
  42. The principles underlying this reasoning are also reflected in the statutory regime for DPAs, which must be approved by a judge as being in the interests of justice; see further Section 21.2.1.2.
  43. BAE Systems at para. 5.
  44. Reduction in Sentence for a Guilty Pleas: Definitive guideline, Sentencing Council, 23 July 2007, at para. 4.2. See also Reduction in Sentence for a Guilty Plea Guideline Consultation, Sentencing Council, 11 February 2016, Section 3, at para. D1.
  45. Rule 3.3, Criminal Procedure Rules 2015 (UK).
  46. The Witness Charter, issued by the Ministry of Justice, December 2013; Code of Practice for Victims of Crime, issued by the Ministry of Justice, October 2015.
  47. The Code for Crown Prosecutors, January 2013, at para. 9.
  48. See ‘Plea discussions in cases of serious or complex fraud’, 29 November 2012; and ‘The acceptance of pleas and the prosecutor’s role in the sentencing exercise’, 30 November 2012, Attorney General’s Office.
  49. Consolidated Criminal Practice Direction, at para. IV.45.10.
  50. In accordance with R v. Goodyear [2005] EWCA Crim 888 and by reference to the Sentencing Guideline.
  51. Guidance on Corporate self-reporting, issued by the SFO, revised in October 2012. See also the Guidance on corporate prosecutions issued by the Director of Public Prosecutions, the Director of the SFO and the Director of the Revenue and Customs Prosecutions Office, issued in 2009/2010.
  52. See Section 21.2.1.2.
  53. See, e.g., ‘US DoJ issues arrest warrant for Briton in Libor probe’, Caroline Binham, 6 February 2015, Financial Times.
  54. Annex A – Eurojust Guidelines – ‘Which Jurisdiction Should Prosecute?’, Annual Report 2003, issued by Eurojust; Agreement for Handling Criminal Cases with Concurrent Jurisdiction between the United Kingdom and the United States of America, January 2007.
  55. Prosecutors’ Convention 2009, agreed by a number of UK prosecuting authorities including, inter alia, the SFO, the FCA, the Crown Prosecution Service and the Attorney General’s Office.
  56. Guidance to accompany the Attorney General’s Guidelines on Plea Discussions in cases of Serious or Complex Fraud, issued by the Director of Public Prosecutions, the Director of the SFO and the Director of the Revenue and Customs Prosecutions Office, 24 May 2012.
  57. Paragraph 5, Schedule 17, Crime and Courts Act 2013 (UK).
  58. Tchenguiz v. Director of the Serious Fraud Office (Non-Party Disclosure), also known as Rawlinson and Hunter Trustees SA v. Akers [2014] EWCA Civ 136 at para. 15.
  59. Practice Direction – Civil Recovery Orders, at paras. 4.1-4.5.
  60. 'MW Kellogg Limited to pay £7 million in SFO High Court action’, press release dated 16 February 2011, SFO.
  61. XYZ Ltd Crown Court (Southwark), 11 July 2016 at para. 28.
  62. XYZ Ltd Crown Court (Southwark), 11 July 2016 at paras. 15-18.
  63. XYZ Ltd Crown Court (Southwark), 11 July 2016 at para. 3.
  64. See further, Section 21.1.
  65. Rule 11.2(3)(c) Criminal Procedure Rules 2015 No.1490(L.18).
  66. Guidance for prosecutors and investigators on their asset recovery powers under Section 2A of the Proceeds of Crime Act 2002, 29 November 2012, Attorney General’s Office.
  67. cf. Thomas LJ in Innospec.
  68. Memorandum of understanding between the Competition and Markets Authority and the Serious Fraud Office, 29 April 2014.
  69. FCA Handbook, Enforcement Guide, E.G. 12 and E.G. Appendices 2 and 3.

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