Global Investigations Review - The law and practice of international investigations

The Practitioner’s Guide to Global Investigations

Fines, Disgorgement, Injunctions, Disbarment: The UK Perspective

04 January 2017

Willkie Farr & Gallagher (UK) LLP

23.1       Criminal financial penalties

Companies and individuals subject to a multi-jurisdictional investigation are most likely to be investigated in the UK by the Serious Fraud Office (SFO), the authority responsible for the prosecution of serious economic crimes in England and Wales. In the event that a company or individual pleads guilty to a criminal charge or is found guilty after trial, the court will apply the Sentencing Council’s Definitive Guideline for Fraud, Bribery and Money Laundering (the Guideline) in determining the financial or other penalty to be imposed. The Guideline was issued on 31 January 2014 and applies to individuals and corporates alike, and includes a specific section dedicated to the sentencing of corporate offenders.

The Guideline applies to all sentences passed on or after 1 October 2014, regardless of the date of the offence.1 Therefore, cases still being investigated and prosecuted under legislation that pre-dates the Bribery Act 2010 (Bribery Act), which came into force in July 2011, will still fall to be sentenced by reference to the Guideline. In applying the Guideline to offences prosecuted under legislation that pre-date the Guideline, the court is entitled to reflect ‘modern attitudes’ to historic offences and make due allowance for any change in maximum sentence for that particular offence, to ensure that the sentence passed is in the interests of justice.2 While in some cases that can result in an increase in penalty, in others it may mean a decrease. For example, under the Bribery Act the maximum sentence is 10 years’ imprisonment whereas before it was seven years. On that basis, it could be argued a fine for a pre-Bribery Act offence calculated using the new Guideline should be discounted by up to 42 per cent to reflect the fact that where the Guideline has to be applied to both pre- and post-Bribery Act conduct, the fine should reflect that Parliament intended conduct after the Bribery Act came into force to be punished more seriously. The Guideline sets out a step-by-step guide to the sentencing process to be used by the court in assessing the sentence to be imposed on individuals and corporates. Set out below are the steps the sentencing court must follow when assessing the penalties to be imposed on a corporate defendant for offences of fraud, money laundering and bribery.

23.2       Compensation

The court must first consider whether any compensation should be paid by the company to the victim, for any injury, loss or damage resulting from the offence.3 The amount of the order will be the amount the court considers appropriate, having regard to any evidence and to any representations made by or on behalf of the accused.4 In respect of such claims, the SFO will need to provide evidence to the court of a request for compensation by the victim. In the case of R v. Smith & Ouzman Ltd,5 Recorder Mitchell QC indicated that he would have refused the SFO’s request for a compensation order as the SFO had not produced evidence of a request for compensation from the victim.

A compensation order is not mandatory, but if it is not made, the court should provide reasons as to why it has not made an order.6 The court must have regard to the financial means of the defendant. If the defendant’s means are limited, priority should be given to the payment of compensation over any other financial penalties.

23.3       Confiscation

Confiscation must be considered if either the Crown asks for it or the court thinks that it may be appropriate.7 The aim of confiscation is to deprive defendants of the benefit that they have gained from their criminal conduct.8 The amount confiscated will represent the total value of the advantage or benefit obtained by the defendant, although the order cannot be for a greater sum than the value of the assets the defendant has available to satisfy it. It is irrelevant whether the defendant has retained the benefit or not. The court must address the following factors before making a confiscation order: (1) whether the defendant has benefited from the criminal conduct; (2) the value of the benefit obtained; and (3) the sum that is recoverable from the defendant.9

The confiscation regime can be particularly harsh. Historically, in corruption cases a prosecutor could claim that the benefit obtained was the entire value of the contract won through the criminal conduct, and request that that amount be confiscated. However, recent case law suggests that the confiscation amount should be proportionate, and restricted to the gross profit earned by the company together with any other pecuniary advantage flowing from the corruption.10 When calculating the gross profit, the approach is typically to ‘add back’ the amount of bribes paid which may have been deducted as an ‘expense’ before arriving at the gross profit.

An important consideration, particularly where companies participate in joint ventures or collaborate on projects, is that if a benefit is determined by the court to have been obtained jointly by co-defendants, the court may make a confiscation order against each defendant for the whole amount of the benefit obtained. 11

Companies and individuals should also be aware that the prosecutor may ask the court to apply the criminal lifestyle provisions. If the court determines that a defendant has a criminal lifestyle (which may be the case if the defendant was convicted of two offences in the previous six years) the consequences can be serious.12 The lifestyle provisions would also apply if a defendant pleads guilty or is convicted of two qualifying offences on the indictment. Perhaps the greatest risk is that it can be shown that the conduct in the indictment was committed over at least six months. If one thinks about an allegation of bribery, this is normally charged as both a conspiracy to bribe, as well as a substantive offence of bribery. Typically, a conspiracy charge will involve the offer of a bribe, the award of a contract and then the payments. This may well take much longer than six months, bringing the lifestyle provisions into play for even a simple one-off corrupt payment. In the case of a corporate defendant, if the conditions above are met, it will be assumed that property transferred or expenditure incurred by a company over the six years preceding the charge was obtained from general criminal conduct, and therefore liable to be confiscated; unless the company can show this assumption to be incorrect or that applying the criminal lifestyle provision would risk serious injustice.13

23.4       Fine

The fine figure is calculated by reference to the harm caused by the particular criminal conduct. For bribery offences, the appropriate figure is normally the gross profit obtained from the criminal conduct. For fraud offences, it is normally the actual or intended gross gain to the offender, and for money laundering offences, the amount of the money laundered.14

Once the relevant harm figure is determined, the court will apply a multiplier, to reflect the culpability of the defendant. The Guideline provides a non-exhaustive list of factors to be taken into account to assess the level of culpability, which will either be high, medium or low. The factors include the role played by the corporate entity in the unlawful activity, the duration of the offence, any obstruction of detection, the scale and vulnerability of the victims, and whether the offence involved the corruption of government officials.15 The multiplier will either be 300 per cent (high), 200 per cent (medium) or 100 per cent (low). The court will then adjust the percentage within the relevant category range (from 20 per cent up to 400 per cent) depending on any aggravating or mitigating factors, a non-exhaustive list of which is set out in the Guideline.16 The fine must represent the seriousness of the offence, as well as the financial circumstances of the defendant.

The court should then ‘step back’ and consider adjusting the level of the fine based on the effect of compensation, confiscation and fine taken together, which should remove the gain, provide appropriate punishment and act as a deterrent. If a defendant is being sentenced for more than one offence, the court must also consider whether the total sentence imposed on the defendant is just and proportionate based on the misconduct. It is perhaps this step-back element which increases the uncertainty as to the size of fine.

Before the Guideline was introduced, Thomas LJ stated in relation to the fine element ‘I approach sentencing on the basis in this case that a fine comparable to that imposed in the US would have been the starting point.’17 This quote was referred to in the first DPA.18 Following that dictum, a judge may decide to step back and increase the fine to the level a US court would impose. Anecdotally, we are aware from recent cases that in one instance the judge did inquire of the SFO what the fine would have been if the US Sentencing Guidelines were being followed. Owing to this level of uncertainty and because the fine cannot be agreed by the prosecution and defence even as part of a plea bargain (or DPA), some corporate offenders may wish to consider asking the court for an indication of the sentence it could expect to receive should it plead guilty, often known as seeking a Goodyear indication.19

The procedure governing such requests is set out in the case of R v. Goodyear, and the Criminal Practice Direction.20 If the request is granted, the indication will be confined to the maximum fine the court would impose if the defendant pleaded guilty at that stage in the proceedings. It will not include ancillary matters such as confiscation. The court cannot give an indication where there is a dispute between the parties as to the factual basis for sentencing. The agreed factual basis should be reduced to writing and placed before the judge. Crucially, the judge has absolute discretion to decline to give any indication. If an indication is given and the defendant does not plead guilty having had a reasonable opportunity to consider it, then the indication will fall away. If the case proceeds to trial, the prosecution will not be able to refer to the request for a Goodyear indication. Finally, a Goodyear indication cannot be sought pre-charge and is therefore unlikely to be of assistance in DPA cases.

23.5       Guilty plea

If a guilty plea is entered by the defendant, the court must give the defendant credit.21 The Reduction in Sentence for a Guilty Plea Definitive Guideline recommends a sliding scale of discount, which will be applied to the harm figure, dependent on the stage at which the plea is entered: one-third for a plea at the first reasonable opportunity; one-quarter once the trial date is set; and one-tenth at the start of or during trial.22 The court should also consider applying a further discount to reflect any assistance provided by the defendant to the prosecution.23

23.6       Costs

The court may make an order in favour of either the prosecution or the defendant.24 Ordinarily, in the event of a plea or a conviction, the court will make an order that the defendant pay the investigation and court costs of the prosecuting body. If a defendant is acquitted or the prosecution does not proceed to trial, the court may make an order in favour of the defendant. A defendant’s costs will be met out of central funds25 in an amount the court considers reasonably sufficient to compensate the defendant for any expenses properly incurred in the proceedings. A defendant’s costs order should usually be made unless there is a positive reason for not doing so.

23.7       Director disqualifications

Under the Company Directors Disqualification Act 1986 (CDDA), any director convicted of misconduct in connection with a company (either in the UK or overseas) or considered to be unfit to be concerned with the management of a company, may be disqualified from the right to manage a company by the making of a disqualification order.26 A disqualification order may bar a person from acting as a director of any UK company for up to 15 years, and the person will be entered on the register of disqualified directors.

It should be noted that proceedings for a disqualification order are not brought by the company itself. If a director is convicted of an indictable offence in connection with the promotion, formation or management of a company,27 it is usually the court before which the director is convicted that will consider whether a disqualification order ought to be made and impose the order. However, in the case of an offence committed outside the United Kingdom, the Secretary of State has standing to apply to the court for a disqualification order, if it appears expedient in the public interest.

The Secretary of State also has standing to apply to court for a disqualification order against a person who is (or has been) a director or a shadow director of a company, if it appears expedient in the public interest. On an application, the court may make a disqualification order where it is satisfied that such person’s conduct in relation to the company (alone or taken together with their conduct as a director or shadow director of one or more other companies or overseas companies) makes them unfit to be concerned in the management of a company.

Following recent amendments to the CDDA, a disqualification order for unfitness may be made on any information properly put before the court that demonstrates that the director or shadow director is unfit to be concerned in the management of a company.28 As an alternative, the Secretary of State has discretion to accept a disqualification undertaking, if it is expedient to do so instead of making an application for a disqualification order.

The matters to be taken into account by the court or the Secretary of State, in considering whether a person’s conduct makes them unfit to be concerned in the management of a company, whether to make a disqualification order and what the period of disqualification should be, are set out in Schedule 1 to the CDDA. Specific matters are to be taken into account where the person in question is or has been a director, including (1) any misfeasance or breach of fiduciary duty by the director in relation to a company or overseas company, (2) any material breach of any statutory or other obligation of the director which applies as a result of being a director of a company or overseas company, and (3) the frequency of any such conduct.

23.8       Civil recovery orders

Companies should also be aware of the SFO’s ability to obtain a civil recovery order (CRO) to recover property it has proved, on the balance of probabilities, is or represents property obtained through unlawful conduct, pursuant to Part 5 of the Proceeds of Crime Act 2002.

The SFO is not required to obtain a conviction to obtain a CRO. The civil standard of proof, and the absence of the need for a conviction has historically made the use of CROs attractive to both the SFO and corporate entities alike. CROs have also been used by the SFO in addition to a prosecution, to target tainted assets. However, CROs, which are in rem actions, have rarely been used by the SFO in this way, as the SFO must show that the property it seeks to recover is in fact the property that has been created by the criminal conduct. Such difficulties associated with proving the exact nature of the property can of course be dealt with by the respondent entity admitting that the property is tainted in the way alleged by the applicant.

One notable case in which the SFO used a CRO to recover tainted assets followed a guilty plea to corruption offences and breaches of UN sanctions in 2009 by the engineering firm Mabey & Johnson Ltd. In 2012, the SFO then successfully obtained a CRO of approximately £130,000 against its parent company, Mabey Engineering (Holdings) Ltd, even though the parent company had no knowledge of the unlawful conduct. The CRO was obtained to recover a sum representing the value of the dividends received by the parent that were derived from contracts won through Mabey & Johnson Ltd’s unlawful conduct.

However, the SFO’s use of CROs as an alternative to prosecution in corporate matters has received considerable criticism. The criticism concerned the lack of detail surrounding the underlying criminal conduct, and the basis on which the SFO decided to pursue a CRO rather than a criminal conviction.

Perhaps in light of this criticism, on 29 November 2012 the Attorney General’s Office published guidance for prosecutors and investigators on how they should use these asset recovery powers.29 The Attorney General’s guidance sets out a non-exhaustive list of circumstances in which these powers might be appropriately used when it is not feasible to secure a conviction. It also sets out a non-exhaustive list of circumstances in which these powers could still be properly used when a conviction is feasible, but the use of asset recovery powers that do not require a conviction might better serve the overall public interest.

The SFO now states that it may use these powers as an alternative (or in addition) to prosecution, but states that if it does so, it will publish its reasons, the details of the illegal conduct and the details of the disposal. The last significant CRO obtained by the SFO as an alternative to prosecution was in 2012.30 (See also Chapter 16 on individuals in cross-border investigations, Section 16.3.3, on unexplained wealth orders.)

23.9       Criminal restraint orders

The SFO and other enforcement authorities are also able to apply for a restraint order in the Crown Court. Such an order prevents a defendant from dissipating, disposing of or detrimentally dealing with its assets. The Crown Court has the power to impose a restraint order, which applies to all ‘realisable property’ currently in the defendant’s possession, or subsequently acquired by the defendant.31 As such, restraint orders are the criminal law equivalent of freezing injunctions.

The legislation stipulates five different scenarios in which a restraint order may be imposed.32 The common thread is that there must normally be reasonable cause to believe that the defendant has benefited from his or her criminal conduct and is likely to dissipate the assets prior to any fine or confiscation order being imposed. If that is the case, an application for a restraint order may be made after commencement of a criminal investigation, during proceedings for an offence, or in the context of specific applications filed by the prosecution.

The court has broad discretion in defining the terms of a restraint order,33 but must require the applicant, usually the SFO, to report to the court on the progress of the investigation at specified intervals.34 A breach of a restraint order constitutes criminal contempt.

23.10     Serious crime prevention orders

Unlike the orders discussed above, Serious Crime Prevention Orders (SCPOs), which were first introduced in the Serious Crime Act 2007 (SCA) and which have been significantly broadened by the Serious Crime Act 2015, can be imposed prior to any finding of criminal liability. SCPOs are civil orders.35

SCPOs may be imposed only upon application by the Director of Public Prosecutions or the Director of the SFO36 where the court is satisfied that the person concerned has been involved in ‘serious crime’ anywhere in the world, and that there are reasonable grounds to believe that an SCPO would protect the public by preventing, restricting or disrupting involvement by the person in serious crime in England and Wales.37 The prosecution needs to prove these matters to the civil standard of proof: namely, it must be more likely than not that the defendant has been involved in serious crime, and that the order would protect the public.38 However, there is authority from the House of Lords regarding Anti-Social Behaviour Orders (ASBOs), which are similar to SCPOs in nature and operation, to the effect that the standard of proof in proceedings where ‘allegations were made of criminal or quasi-criminal conduct which, if proved, would have serious consequences for the person’ is the criminal standard of proof, namely beyond reasonable doubt.39 It is unclear whether this would apply to SCPOs notwithstanding the statutory provisions, but the CPS has taken the view that the criminal standard does apply to the issue as to whether a defendant was ‘involved’ in serious crime.40

There are two types of SCPO: Crown Court orders and High Court orders. The Crown Court may impose an SCPO only upon conviction of a person for a serious crime. The High Court has jurisdiction to make an order without the need for a conviction.41 The distinction turns on proof of ‘involvement in’ as opposed to ‘conviction of’ a serious offence. It follows that ‘involvement’ is broader than ‘conviction’, and includes conduct that may have facilitated the commission by another of a serious offence in England and Wales,42 or that was likely to facilitate such offence, whether or not it was actually committed.43

‘Serious crime’ is defined broadly, and includes any offence listed in Part 1 of Schedule 1 to the SCA, as well as any other offence ‘which, in the particular circumstances of the case, the court considers to be sufficiently serious to be treated’ as serious crime for the purposes of an SCPO application.44 Schedule 1 lists an array of specific offences under 16 headings, ranging from trafficking in arms, to money laundering, fraud, tax evasion and bribery.45

SCPOs may be imposed on individuals as well as bodies corporate, partnerships and unincorporated associations.46 Where a corporation is in breach of an order, the court may order its dissolution where to do so would be ‘just and equitable.’47 The court has wide discretion in formulating the terms of the SCPO.48 The overriding test for imposition of an SCPO is that the court may include such terms as it considers ‘appropriate for the purpose of protecting the public by preventing, restricting or disrupting involvement by the person concerned in serious crime in England and Wales.’49 Section 5 of the SCA contains a non-exhaustive list of restrictions that might be imposed, such as limitations on financial, property or business dealings;50 a person’s associations or communications;51 use of any item;52 and travel both within and outside the jurisdiction.53 Notably, an SCPO may also include a requirement to provide specified information or disclose documents to law enforcement.54 While this is subject to legal professional privilege,55 there is no provision in the SCA to protect the right against self-incrimination. However, a statement made by the defendant in compliance with a request for information may not be given in evidence against the defendant.56

The National Crime Agency (NCA) has published a list of all SCPOs in force. As of 17 August 2016, there are 221 SCPOs in force.57 They have been imposed for a range of offences, ranging from drug trafficking (by far the largest category) to money laundering, illegal immigration and fraud. The conditions imposed in the orders vary in severity, but include restrictions on possessing cash and financial reporting requirements. However, this list does not include SCPOs obtained by local police authorities or HMRC that the NCA was not notified of. As of 31 March 2014, there were 136 SCPOs in place that were not obtained by the NCA.58 The vast bulk of orders were obtained post-conviction in the Crown Court; there appears to be only one instance where an SCPO was obtained in the High Court.59

One possible SCPO could be a form of monitorship. To date monitors have been appointed following a criminal plea, a CRO and a DPA. In each case the appointment of a monitor would likely have been agreed as part of the overall resolution of the case. However, SCPOs permit the courts to impose a monitor.

23.11     Regulatory financial penalties and other remedies

Companies and individuals may also face regulatory sanctions for their misconduct. The primary regulatory authority is the Financial Conduct Authority (FCA), which regulates firms and individuals performing regulated financial services activities, such as banks, credit unions and insurance firms. The FCA may bring enforcement action against these firms (as well as individuals) in connection with economic crimes to the extent that it considers there has been a regulatory breach.

On 6 March 2010, the FCA adopted a new method of calculating financial penalties and published the procedure in the Decision Procedure and Penalties Manual (DEPP). The new procedure allows the FCA to take into account the revenue generated by the relevant part of the financial institution when determining the level of the fine, which may well be in excess of any gain made through misconduct. In relation to an individual, the FCA will look at the gross amount of any benefit received by the individual in connection with the breach when assessing the fine figure.

The use of the new procedure has resulted in the FCA imposing fines on financial institutions for conduct after 6 March 2010 that are substantially higher than fines that would have been imposed under the previous penalty regime. If the relevant conduct spans the date of both the old and new penalty procedures, the FCA will apply the old procedures to the conduct preceding 6 March 2010 and the new procedures to the subsequent conduct.

23.11.1   Penalty regime before 6 March 2010

When determining the financial penalty for any failings before 6 March 2010, the FCA will take the following factors into account:60

  • the deterrent effect of any fine;
  • the nature, seriousness and impact of the breach;
  • the extent to which the breach was deliberate or reckless;61
  • the amount of benefit gained or loss avoided;
  • the conduct following the breach;
  • any mitigating and aggravating factors;
  • any other regulatory action taken by the FCA.

23.11.2   Penalty regime after 6 March 2010

Under the new penalty regime, the FCA uses five steps to determine the level of a financial penalty it will impose on a firm for a regulatory breach:62

  1. disgorgement, normally the revenue made, or the loss avoided from the breach;
  2. seriousness of the breach;63
  3. any mitigating and aggravating factors;
  4. adjustment for deterrence;64
  5. settlement discount.65

Since the introduction of the new regime, the FCA has an increased flexibility in determining the level of financial penalty to be imposed on a financial institution. For any misconduct after 6 March 2010, the new penalty regime gives the FCA wide discretion in determining the ‘relevant revenue’ forming the basis for the penalty, and this can now include the underlying revenue of the relevant part of the financial institution. Since the introduction of the revised DEPP, there has been a steady increase in the level of fines imposed by the FCA (or its predecessor) from a total of just over £66 million in 2011 to nearly £1.5 billion in 2014.66

23.12     Withdrawing a firm’s authorisation

In addition to imposing financial penalties on authorised firms and individuals, the FCA has a number of other powers at its disposal to it meet its strategic and operational objectives, in particular ensuring that financial markets function well, protecting consumers and ensuring integrity and competition in the markets.67 Perhaps the most draconian measure the FCA can impose on a firm is the withdrawal of its authorisation to engage in regulated activities.

The Financial Services and Markets Act 2000 (FSMA), as substantially revised by the Financial Services Act 2012, imposes a general prohibition on a person or entity engaging in ‘regulated activities’, which are defined in Schedule 2 to FSMA, but include most financial advisory and transactional work.68 The general prohibition applies unless a person, legal or natural, is exempt or has been ‘authorised’ to engage in such activity under FSMA.69 A common form of such authorisation is permission given by the FCA to a firm under Part 4A of FSMA. In granting permission, the FCA must ensure that the authorised person is satisfying certain ‘threshold conditions’, and will continue to do so. One key threshold condition is suitability: an authorised person must be ‘a fit and proper person having regard to all the circumstances.’70 The FCA’s powers include a right to cancel this permission if it appears to the FCA that the authorised person is failing or is likely to fail to fulfil the threshold conditions.71

The withdrawal power is exercisable where the FCA believes that it is ‘desirable to exercise the power in order to advance . . . one or more of its operational objectives.’72 While the power is broadly worded, the FCA’s Enforcement Guidelines state that the cancellation power will be exercised mainly where the FCA has ‘very serious concerns’ about a firm, or the way its business is or has been conducted.73 More specifically, this will be the case where the firm in question has repeatedly failed to comply with FCA rules and requirements, or has failed to co-operate with the FCA in its supervisory capacity.74 Withdrawal of permission means that the authorised person ceases to be authorised and cannot engage in any regulated activities.75 As an alternative to withdrawing permission, the FCA has broad powers to vary a Part 4A permission, or to impose specific conditions on its exercise instead.76

23.13     Approved persons

FSMA distinguishes between regulated activity and controlled functions. ‘Controlled functions’ are defined in the FCA Handbook,77 and include functions such as director, chief executive or partner. In essence, senior positions within an entity that is an ‘authorised person’ under FSMA must be held by persons who are specifically approved by the FCA for that purpose. This requires a formal application to the FCA,78 which will need to be satisfied that the person is ‘fit and proper’,79 taking into account such matters as qualifications, training, competence and other personal characteristics.80 The FCA Handbook contains a mandatory reporting and disclosure requirement in relation to approved persons. An authorised person must inform the FCA ‘if it becomes aware of information which would reasonably be material to the assessment of an FCA-approved person’s . . . fitness and propriety.’81 The FCA has a broad power to withdraw approval, and this is not predicated on a report from an authorised person.82 The FCA will however first consider whether its objectives can be adequately achieved by imposing less draconian measures, such as public censures, financial penalties and private warnings.83

23.14     Restitution orders

The FCA is also empowered to seek restitution where it seeks to remedy any profit made, or loss caused, by a breach of certain FSMA rules to those adversely affected by that breach. Under Part XXV of FSMA, a restitution order may be imposed where the High Court is ‘satisfied that a person has contravened a relevant requirement, or been knowingly concerned in the contravention of such a requirement.’84 Further, the person against whom the order is sought must either have profited from the contravention, or must have caused loss or otherwise an adverse effect to another.85

The FCA will take the following considerations into account in determining whether to seek restitution, in the light of ‘all the circumstances of the case’:86 whether the profits or losses are quantifiable; the number of persons affected; costs to the FCA; alternative redress, such as compensation schemes or another regulator; whether victims can be expected to bring proceedings in their own right; the firm’s solvency; alternative powers available to the FCA; and the conduct of persons having suffered loss, for example whether they have contributed to their loss.87 This list is not exhaustive. If it finds that these requirements are met, the court may order restitution of a sum it considers ‘just’ having regard to the profits made or loss caused, as the case may be.88 If the court orders restitution, the money will be paid to the FCA rather than to the person who has suffered loss or at whose expense a profit has been made (FSMA refers to these as ‘qualifying persons’).89 However, the FCA must then disburse the money among the qualifying persons according to the terms of the court order.90 The payment of restitution does not bar an ancillary civil claim for damages to be brought by qualifying persons.91

23.15     Debarment

In addition to financial penalties, companies will need to be mindful of the impact that any conviction, or misconduct not resulting in a conviction, may have on their ability to tender for public contracts. A conviction or certain misconduct may result in debarment from tendering for public procurement contracts. The rules governing debarment are contained in the Public Contracts Regulations 2015 (the Regulations), which came into force in the UK on 26 February 2015, and implemented the EU Procurement Directive (the Directive).92

Debarment can be mandatory or discretionary. Debarment is mandatory if the economic operator (i.e., the tendering company) has been convicted of a specific category of offence, including economic crimes such as bribery, corruption, money laundering, and fraud or conspiracy to defraud affecting the EU’s financial interests. Debarment will also be mandatory if an individual who is a member of the relevant company’s administrative, management or supervisory body, or has powers of representation, decision or control in the company, is convicted of one or more of these offences.93

In comparison with the previous legislation, which imposed an automatic, indefinite debarment for companies convicted of these types of offence, mandatory debarment now only applies for a maximum of five years.

Discretionary debarment applies to a different range of conduct, including insolvency, the distortion of competition, and where a contracting authority is able to demonstrate by appropriate means that a company is guilty of grave professional misconduct rendering its integrity questionable. An authority may exclude a company from participation in procurement procedures94 for three years following such conduct.95

While the Regulations do not define ‘grave professional misconduct’, the European Court of Justice has interpreted this term as covering ‘all wrongful conduct which has an impact on the professional credibility of the operator’.96 Reference to a conviction for an economic crime outside the remit of mandatory debarment could form the basis for demonstrating such misconduct.

The most significant change in respect of debarment in the UK is the introduction of self-cleaning, which applies to both mandatory and discretionary debarment. The Regulations set out a number of conditions which, if a company meets them, can demonstrate that company’s suitability for access to public procurement tenders, despite the existence of prior grounds for mandatory or discretionary exclusion. The conditions include the payment of compensation, co-operation with investigative authorities and taking concrete measures to prevent further criminal offences or misconduct. If a contracting authority considers evidence of self-cleaning provided to it by a company to be sufficient, it will not debar the company.97 The gravity and circumstances of the misconduct are relevant factors when evaluating whether a company has self-cleaned such that, the graver the offence, the more comprehensive these steps will need to be.98

23.16     Outcomes under a DPA

Even when a company in the UK enters into a deferred prosecution agreement (DPA), it will still be subject to the range of financial penalties applicable to a plea or a conviction. The legislation and DPA Code99 state that the level of financial penalty imposed should be broadly comparable to a fine that a court would have imposed following a guilty plea,100 which would ordinarily be a reduction of one third. However, in the most recent DPA101 approved by the court, Sir Brian Leveson, President of the Queen’s Bench Division, considered that a 50 per cent reduction was appropriate as the company had self-reported in a timely way and had fully co-operated with the SFO. The court in its judgment stated that the reduction was made to encourage others to act in a similar way when confronting corporate criminality.102

In addition to a reduced fine, as a DPA does not amount to a conviction, the mandatory debarment provisions of the Regulations will not apply. However, if a DPA is agreed and approved by the court, the DPA and the underlying facts and conduct will be published. A contracting authority may consider that the underlying facts and conduct as set out in the DPA are an ‘appropriate means’ of demonstrating that a company is guilty of ‘grave professional misconduct’, in accordance with the Regulations, resulting in discretionary debarment from public procurement procedures, as considered above.

23.17     Disclosure to other authorities

A look at recent UK and US enforcement action shows that UK and US enforcement authorities co-operate with each other and a number of other enforcement authorities around the world. Such co-operation may be governed by legislation, a memorandum of understanding, or less formally through information sharing gateways. It is therefore possible that, if a company or individual is found criminally liable or in breach of its regulatory obligations in the UK or the US, the details of the offence or regulatory breach will be made known to interested enforcement authorities in other jurisdictions. If the company or individual faces liability in those jurisdictions, disclosure by the UK and US authorities may lead to further enforcement action. This issue is naturally one that should be considered prior to a company or individual accepting any criminal or regulatory liability or entering into any type of agreement with enforcement authorities. Issues surrounding companies seeking a negotiated settlement are dealt with in Chapters 21 and 22.

Even if a company is not facing criminal or regulatory liability in other jurisdictions, it will still need to establish whether the local legal requirements would require a disclosure of a finding of criminal liability and subsequent financial penalty. Whether a disclosure is required will depend on the jurisdiction in which the company operates. If there is no local legal requirement to make such a disclosure, foreign enforcement authorities may still expect to be notified of any finding of liability and subsequent financial penalty. Whether a voluntary disclosure is made will turn on what is expected by the local regulator, and what implications that disclosure or non-disclosure may have.

Notes

  1. Sentencing Council: Fraud, Bribery and Money Laundering Definitive Guideline, 1 October 2014.
  2. R v. Hall [2011] EWCA Crim 2753; R v. Clifford [2014] EWCA Crim 2245.
  3. s.130(1)(a) of the Powers of Criminal Courts (Sentencing) Act 2000.
  4. s.130(4) of the Powers of Criminal Courts (Sentencing) Act 2000.
  5. Unreported, Southwark Crown Court, 7 January 2015
  6. s.130(3) Powers of Criminal Courts (Sentencing) Act 2000.
  7. The Guideline, p. 48.
  8. s.6 Proceeds of Crime Act 2002.
  9. R v. May [2008] 1 AC 1028.
  10. R v. Waya [2012] UKSC 51, [2012] 3 WLR 1188: courts must consider Article 1 of Protocol 1 of the ECHR when making a confiscation order, and ensure in particular that confiscation be proportionate to the legitimate aim of recovery of the proceeds of crime.]; R v. Sale [2013] EWCA Crim 1306.
  11. R v. Ahmad and Fields [2015] AC 299. Any sum recovered from one defendant must be taken into account when bringing an action against another.
  12. s.75 Proceeds of Crime Act 2002 sets out the three tests, the offence (1)) is specified in Schedule 2 of the Proceeds of Crime Act 2002; (2)) the offence constitutes conduct forming part of a course of criminal activity; or (3) was committed over a period of at least six months and the defendant has benefited from the conduct.
  13. s.10 Proceeds of Crime Act 2002.
  14. The Guideline, p. 49.
  15. Ibid.
  16. Ibid., p. 50.
  17. R v. Innospec Ltd, Southwark Crown Court, 26 May 2010, unreported.
  18. SFO and Standard Bank Plc, 30 November 2015.
  19. See R v. Goodyear [2005] 1 WLR 2532.
  20. CPD VII Sentencing C: Indications of Sentence.
  21. s.144 Criminal Justice Act 2003.
  22. The Reduction in Sentence for a Guilty Plea Definitive Guideline, Revised July 2007, p. 5.
  23. R v. Wood [1992] 2 Cr App R (S) 347.
  24. Prosecution of Offences Act 1985; Access to Justice Act 1999; Lord Chief Justice’s Practice Direction (Costs in Criminal Proceedings) 201; and Costs in Criminal Case (General) Regulations.
  25. s.16 of the Prosecution of Offences Act 1985.
  26. s.2(1), s.5A(2) and s.8(2) of the CDDA.
  27. In addition, any conviction in connection with the liquidation or striking off of a company, with the receivership of a company’s property and/or with being an administrative receiver of a company’s property may also result in a disqualification order: s.2(1) CDDA.
  28. s.109 of the Small Business, Enterprise and Employment Act 2015 removed the previous reference to ‘investigative material’ in s. 8 of the CDDA, with effect from 1 October 2015.
  29. Guidance for prosecutors and investigators on their asset recovery powers under Section 2A of the Proceeds of Crime Act 2002, 29 November 2012.
  30. Oxford Publishing Limited: https://www.sfo.gov.uk/2012/07/03/oxford-publishing-ltd-pay-almost-1-9-million-settlement-admitting-unlawful-conduct-east-african-operations/.
  31. s.41(2), Proceeds of Crime Act 2002; this is subject to a number of exceptions, such as for legal fees and ordinary living expenses.
  32. Ibid., s.40.
  33. Ibid., s.41(7).
  34. Ibid., s.41(7B)(a).
  35. SCA s.35(1).
  36. SCA s.8. Thus SCPOs are not available in private prosecutions.
  37. SCA s.1(1).
  38. SCA s.35(2).
  39. R v. Manchester Crown Court ex p McCann [2002] UKHL 39, [2003] 1 AC 787.
  40. CPS Guidance, para. 13.1.
  41. SCA s.1(1).
  42. SCA s.2(1)(b).
  43. SCA s.2(1)(c).
  44. SCA s.2(2).
  45. SCA Sched. 1. In particular offences under: Proceeds of Crime Act 2002, ss.327 (concealing, etc. criminal property), 328 (facilitating the acquisition, etc. of criminal property), and 329 (acquisition, use and possession of criminal property); Fraud Act 2006 ss.1 (fraud by false representation, failing to disclose information or abuse of position) and 11 (obtaining services dishonestly); Bribery Act 2010 ss.1 (offences of bribing another person), 2 (offences relating to being bribed), 6 (bribery of foreign public officials).
  46. SCA s.30.
  47. SCA s.27(4)(b).
  48. The court may include a provision allowing a law enforcement agency to enter into a monitoring arrangement with a third-party contractor, and to have the subject of the SCPO pay some of the costs: SCA s.39(4), (5).
  49. SCA s.1(3) (High Court); s.19(5) (Crown Court). Other legislation dealing with civil orders in furtherance of the criminal law, such as ABSOs, sexual offences prevention orders and terrorism prevention and investigation measures impose a requirement of ‘necessity’ rather than ‘appropriateness’. As most applications for an SCPO will engage one or more Convention rights, however, the court will need to consider the Human Rights Act 1998, in particular the precept of proportionality, which includes necessity. See also CPS Guidance, para. 13.3 et seq.
  50. SCA s.5(3)(a).
  51. SCA s.5(3)(c).
  52. SCA s.5(3)e).
  53. SCA s.5(3)(f).
  54. SCA s.5(5)(a). But a requirement to provide information orally is not permissible: SCA s.11.
  55. SCA s.12.
  56. SCA s.15. This is similar to the provisions under the Criminal Justice Act 1987 s.2.
  57. See http://www.nationalcrimeagency.gov.uk/publications/621-ancillary-orders. The list includes financial reporting orders, which preceded SCPOs and were merged within the latter category by the Serious Crime Act 2015. Any orders obtained by the NCA’s predecessor, the Serious Organised Crime Agency, are equally included.
  58. Home Office Fact Sheet, ‘Serious Crime Act 2015: Improvements to Serious Crime Prevention Orders.’ Available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/415969/Fact_sheet_-_SCPOs_-_Act.pdf.
  59. Ibid.
  60. CA Handbook, Decision Procedure and Penalties Manual (DEPP) 6.5 (previous version applicable to breaches pre-6 March 2010).
  61. For corporate entities, the FCA does not need to conclude that the actions of the institution as a whole were deliberate or reckless, but that the actions of the relevant employees within the institution were. The FCA may then find that owing to the improper actions of the employees, the financial institution was reckless in failing to ensure that its systems and controls were adequate to meet its regulatory obligations.
  62. FCA Handbook, Decision Procedure and Penalties Manual (DEPP) 6.5 (current version updated 6 March 2010).
  63. In relation to corporate entities this figure will be determined by reference to the ‘relevant revenue’ from the particular product line or business during the period of the breach. The FCA will determine what percentage of the revenue figure it considers to be an appropriate financial penalty, from a minimum of 0 per cent to a maximum of 20 per cent. The assessment is based on a number of factors including the impact and nature of the breach, and whether the breach was deliberate or reckless. A Level 5 breach is most serious at a 20 per cent penalty, reducing in 5 per cent increments, such that a Level 1 breach is 0 per cent. The figure to be imposed under this section is in addition to the disgorgement amount.
  64. If the FCA considers the figure arrived at after Step 3 is insufficient to deter the firm that committed the breach, or others, from committing further or similar breaches, the FCA may increase the financial penalty.
  65. If the financial institution settles at the earliest stage, it will receive a 30 per cent reduction on the financial penalty. However, this will not apply to any disgorgement sum due.
  66. http://www.fca.org.uk/firms/being-regulated/enforcement/fines.
  67. FSMA s.1B(1)-(3).
  68. FSMA Sched. 2.
  69. FSMA s.19.
  70. FSMA Sched. 6, para. 2E.
  71. FSMA s.55J(b). Other threshold conditions relate to matters such as office location, effective supervision, resources, and business model. The FCA may also cancel permission if the authorised person has not engaged in regulated activity in the previous 12 months: s.55J(b).
  72. FSMA s.55J(c).
  73. FCA EG 8.5.1.
  74. FCA EG 8.5.2(7), (8); see also FSMA s.55L(2).
  75. FSMA ss.19, 31(1)(a).
  76. FSMA ss.55J, 55L.
  77. See FSMA s.56(3); FCA Handbook SUB 10C.4 and SUB 10A.4.4.
  78. FSMA s.60.
  79. FSMA s.60(1).
  80. FSMA s.60(2).
  81. FCA Handbook, SUB 10A.14.17.
  82. FSMA s.63.
  83. FAC EG 9.3.1.
  84. FSMA s.382(1), (6). The meaning of ‘relevant requirement’ is somewhat narrower than under the injunction provisions, but is substantially the same; see s.382(9).
  85. Ibid.
  86. FCA EG 11.2.1.
  87. Ibid.
  88. FSMA s.382(2).
  89. FSMA s.382(2).
  90. FSMA s.382(3).
  91. FSMA s.382(7).
  92. Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement.
  93. Regulation 57(1).
  94. Regulation 57(8)(c).
  95. Regulation 57(12).
  96. Case C-465/11 Forposta v. Poczta Polska; para. 27. This was in light of Article 45(2) of the previous Public Procurement Directive, Directive 2004/18/EC, though it remains persuasive to the new Public Procurement Directive.
  97. Regulation 57(13).
  98. Regulation 57(16).
  99. Deferred Prosecution Agreements Code of Practice, Crime and Courts Act 2013.
  100. Crime and Courts Act 2013, Schedule 17, Paragraph 5(4).
  101. SFO v. XYZ [2016] (identity of defendant subject to reporting restrictions at the time of publication); redacted preliminary and final judgments available at https://www.sfo.gov.uk/2016/07/08/sfo-secures-second-dpa/.
  102. Ibid. para. 57 of preliminary judgment.

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