Self-reporting financial crime: moving the goal posts | Practical Law

Self-reporting financial crime: moving the goal posts | Practical Law

The landscape for self-reporting financial crime is changing, with the Serious Fraud Office’s recent change in emphasis, and the Ministry of Justice’s proposals for deferred prosecution agreements.

Self-reporting financial crime: moving the goal posts

Practical Law UK Articles 1-522-6197 (Approx. 4 pages)

Self-reporting financial crime: moving the goal posts

by Gary DiBianco and Matthew Cowie, Skadden, Arps, Slate, Meagher & Flom (UK) LLP
Published on 28 Nov 2012United Kingdom
The landscape for self-reporting financial crime is changing, with the Serious Fraud Office’s recent change in emphasis, and the Ministry of Justice’s proposals for deferred prosecution agreements.
In 2008, bridge manufacturer Mabey & Johnson Ltd became the first company in UK criminal history to self- report serious corporate misconduct, resulting in a sentence for breaches of sanctions and corruption offences in September 2009. Three years later, there have been approximately 20 corporate self-reports to the Serious Fraud Office (SFO), predominantly concerning overseas bribery (Director of the Serious Fraud Office, Richard Alderman, speech at the Wafic Said Business School, 6 March 2012).
The landscape for self-reporting is changing, however, with the SFO's recent change in emphasis, and the Ministry of Justice's (MoJ) proposals for deferred prosecution agreements (DPAs).

SFO policy

In May 2009, the SFO issued public guidance to encourage companies to self-report instances of overseas bribery (2009 guidance). The benefits of self-reporting included the possibility of a civil, rather than criminal, outcome to an investigation. Following the enactment of the Bribery Act 2010 (2010 Act), the SFO reiterated its self-reporting policy in public statements and guidance.
However, after a change in the SFO's leadership in April 2012, the 2009 guidance was quietly removed from its website. On 9 October 2012, the SFO announced several major policy statements concerning enforcement of the 2010 Act, including on self-reporting (9 October announcement). The 9 October announcement emphasised that the SFO is an agency devoted to the prosecution of serious economic crime, and made clear that, while self-reporting is one factor in whether to initiate a corporate prosecution, "self-reporting is no guarantee that a prosecution will not follow" ( It is not clear if the SFO intends to publish any further and longer guidance on self-reporting procedures.
The SFO also stated that where the Code for Crown Prosecutors' test has not been established (that is, where a prosecution is either not viable on the evidence or not in the public interest to prosecute), the SFO would consider civil recovery proceedings under the Proceeds of Crime Act 2002 as an alternative to prosecution.

Deferred prosecution agreements

One historical impediment to encouraging voluntary reporting of corporate misconduct has been the justice system's inflexibility in resolving criminal investigations in the UK. While the US has taken advantage of agreements to defer prosecution of a corporate defendant without entry of a guilty plea, UK law does not currently provide for such an outcome, leaving little middle ground between non-prosecution or a civil resolution (either of which may be too lenient in the eye of the regulator) and a criminal plea (which may be unacceptable to a corporate entity) (see Focus "US-style deferred prosecution agreements: can they work here?").
On 23 October 2012, the MoJ published the results of its public consultation, as well as the government's response to the consultation, on a proposal (the proposal) to introduce DPAs as a new enforcement tool to deal with economic crime committed by commercial organisations in England and Wales (Deferred Prosecution Agreements: Government response to the consultation on a new enforcement tool to deal with economic crime committed by commercial organisations).
The government will introduce amendments to the Crime and Courts Bill, which is currently in Parliament, consistent with the proposal. If the Bill is enacted, DPAs will be in force in England and Wales for conduct preceding and postdating the coming into force of the Crime and Courts Act.
The MoJ envisages that DPAs will be used primarily for companies that self-report or co-operate with government investigations, and it intends that this form of outcome will be made available for companies in overseas corruption cases as well as other economic crime cases. Importantly, the Justice Minister, Damian Green, stated that the introduction of DPAs will "encourage[] organisations to self-report not only their own wrongdoing, but also wrongdoing within their business sector or market".
The new Director of the SFO, David Green QC, has publicly supported the introduction of DPAs, and so his reference to a "prosecution first" policy in the 9 October announcement must be read in the context that the SFO will use DPA settlements as an alternative to prosecution as and when they become available.

Sentencing issues

Companies considering a discretionary self-report will know that they will have to navigate a number of uncertainties in English sentencing laws. There is no comprehensive and clear guidance on corporate criminal financial penalties, discounts for co-operation or a guilty plea, confiscation principles or EU debarment rules in the event of a plea of guilty to corruption.
Addressing a lack of corporate sentencing principles, the MoJ stated in the proposal that the Sentencing Council intends to provide appropriate sentencing guidelines for offences committed by an organisation that enters into a DPA. The MoJ also canvassed views on the percentage discount of the financial penalty element of a DPA. However, it was not sympathetic to a number of consultees who proposed that the co-operation discount should be more than one-third of the applicable guideline.
Further, the MoJ's assertion that a DPA is not a sentence and, therefore, not a conviction, affects two related issues: mandatory debarment from EU public procurement under the Public Contracts Regulations 2006 (SI 2006/5), and the post-conviction confiscation regime.
Although mandatory debarment will not be activated by a DPA, the MoJ's view as expressed in the proposal is that discretionary debarment remains a possibility "on a case by case basis" with the primary criterion for consideration for debarment being the nature and seriousness of the offence. Unfortunately, as a policy matter, the EU debarment rules do not properly recognise the importance of a company addressing corporate and individual remediation after detection of the offending behaviour; they therefore will remain an obstacle for companies that rely on public contracts within the EU.
With regard to confiscation, there is no settled law on the meaning of "benefit" for the purposes of calculating the available amount to be confiscated when a company obtains a contract by corruption. The relevant regulator could advance an enforcement claim that the benefit should be calculated on a revenue, rather than profitability, basis. If this enforcement theory were to be successful or even mainly successful, the value of the confiscation would exceed applicable fines in the bigger cases. Consequently, as confiscation is engaged by a conviction, a company under a DPA would not face the uncertainty of application of the UK confiscation principles.

A new era?

Before its change in approach, the SFO pledged "to try and find satisfactory, sensible and prior just solutions" when a company self-reported. This was viewed as a predisposition to resolve self-reports by way of civil recovery. Indeed, in 2011, the SFO did not bring any criminal enforcement matters against companies; however, three significant investigations involving companies, including self-reported cases totaling £23 million in recovered funds, were resolved by way of civil recovery proceedings.
As in the case of a US DPA, no self-reporting company can guarantee a DPA outcome; nevertheless, absent other aggravating circumstances, and despite the SFO's new stance, the prospects for a DPA after a properly investigated self-report with individual/corporate remediation steps having been taken must be good.
If the government's objectives follow through to clear and comprehensive sentencing guidance and the legislation is administered fairly and consistently by the regulators and courts, the DPA proposal should restore the primacy of criminal justice sanctions for corporate economic crime and increase the number of advisable discretionary self-reports.
Gary DiBianco is a partner, and Matthew Cowie is Counsel, at Skadden, Arps, Slate, Meagher & Flom (UK) LLP. The views represented are those of the authors.