This article was originally written for and published in Compliance Monitor.
Though the UK has started down the path of Deferred Prosecution Agreements (DPAs), James Carlton and Sona Ganatra argue it is unclear if they will deliver fair, cost effective and swifter outcomes.
In October 2012 the Government published its response to the consultation on DPAs and announced legislative amendments that brought the introduction of DPAs in the UK one step closer.
DPAs effectively allow corporations to escape prosecution in exchange for compliance with a range of stringent conditions, including taking remedial action and paying a penalty. The intention behind introducing DPAs in the UK must be to encourage corporates to self report their bad behaviour and for the Government to continue more effectively its fight against economic crime.
DPAs are not new. In the US the use of Pre-Trial Diversion Agreements (which include DPAs and non-prosecution agreements) has, over the last decade, steadily become the preferred means of settling criminal investigations against corporations.
Currently, UK prosecuting authorities are somewhat limited in their response to economic crime. They have two options: criminal prosecution or civil recovery. As the Government has acknowledged, neither of these options may be appropriate. Criminal sanction following prosecution may have unintended and disproportionate consequences – from suspension or debarment from contracting with government entities and/or international organisations to the possible collapse of the business. From the prosecuting authorities’ perspective, the average SFO prosecution lasts for a staggering three-and-a-half years and costs approximately £1.4 million. Civil recovery, under Part V of the UK Proceeds of Crime Act 2002, is only available where the corporate is prepared to plead guilty to a criminal offence and ultimately may not result in restitution for the victims of the misconduct.
A gap therefore exists in the armoury of the UK prosecuting authorities to react to economic crime swiftly, effectively and proportionately.
Under the proposed DPA framework, it is expected that prosecutors and corporations will negotiate financial penalties and, if appropriate, further remedial steps, such as requiring corporations to review their governance structures or invoke disciplinary procedures against individuals involved. Importantly, and in contrast to the US, it is proposed that there will be judicial involvement in the proposed DPA at an early stage in the process and it will ultimately rest with the UK judiciary, in open court, to either provide final approval of the DPA or determine whether prosecution should still be sought for the wrongdoing. This process, it is believed, will go a long way towards addressing recent criticisms within the US about the transparency of DPAs.
Will DPAs offer an effective alternative to prosecution?
The experience in the US is that while DPAs preserve prosecutorial resources and offer a cost effective solution for the regulators, the burden of that cost is in practice borne by the corporate defendants who are also faced with abiding by the terms of the DPA and the threat of potential prosecution for a significant period of time. Similar issues are likely to arise with the proposed UK model.
Much of the detail of how the DPAs will work in practice is still undecided. It is unclear, for example, how compliance will be monitored, how the judiciary will be engaged in the process as well as how information disclosed during negotiations will be treated. The Government has announced that there will be a Code of Conduct published as part of the DPA framework, which ought to deal with at least some of these issues. Nevertheless, it is difficult to see how active judicial involvement from the outset sits with the aim of DPAs being a cost and time effective solution to economic misconduct. This issue also clearly goes to the heart of the constitutional separation of powers between the prosecuting authority and the judiciary, as the decision to enter into a DPA may conceivably become the function of the judge rather than the prosecuting authority. Such an active role in the DPA process will require a change in the mindset of the judiciary, who, historically, have been critical of the SFO in the past for entering into ‘plea bargains’ and may lead to UK judges ultimately morphing into their civil law counterparts – examining magistrates.
The Government’s proposals also fail to explain how the UK prosecutors will be able to ensure greater cooperation with international regulators, particularly given the significant differences between the proposed UK regime and, for example, the US regime. Past experience has shown that, for example, US DPAs have, practically speaking, had little impact on globally-enforceable settlement agreements. Early involvement in the DPA process by the UK judiciary may well further complicate the possibility for cooperation between international regulators necessary to reach global settlement resolutions. The Government urgently needs to address this issue and enter into formal memorandums of understanding with the US and other key jurisdictions (including Scotland, which surprisingly is not part of the DPA framework) in order for DPAs to become an effective alternative for prosecution.
While it is clear that DPAs do have a role in the battle against economic crime in the UK, it is still too early to tell whether they will encourage early engagement with the prosecuting authorities and achieve the Government’s aims of cost effective and swifter outcomes. There is also the fundamental issue of whether there is sufficient incentive for corporations to enter into DPAs in the UK, particularly in light of the recent series of failed investigations brought by the SFO. This is in stark contrast to the position in the US, where the authorities have a strong, successful track record of prosecutions. Indeed, there is a concern that with their ability to raise revenue, the cash-strapped UK prosecuting authorities may attempt to enforce DPAs with this motive at the fore.
Unless and until these issues are addressed, the DPA initiative may well fall short of delivering fair results to responsible corporations, and fairness and transparency in the process.