A deal to sanction a deal

The first Deferred Prosecution Agreement (DPA) was formally agreed yesterday by Sir Brian Leveson President of the Queen’s Bench Division at the High Court in London. Total financial penalties of  around $33 million consisting of a fine of $16.8 million, compensation of $6 million plus interest, disgorgement of $8.4 million and the SFO’s costs of £330,000 were agreed in a deal that Leveson concluded was fair, reasonable and proportionate.

DPAs were introduced in February 2014 to provide the SFO with an easier route to the sanctioning of corporate offending. The introduction of DPAs is not, as some may think, a tweak to the criminal justice system to enshrine in statute a practice that has been commonplace over the past decade.  DPAs represent a fundamental shift in the dynamic of criminal investigation and trial. The prosecutor is now permitted to invite a corporate to enter DPA negotiations rather than pursuing the traditional route of conducting a full independent criminal investigation. A high degree of co-operation in this first case was highlighted by both the judge and the SFO as the key reason why a DPA, rather than a prosecution, was in the public interest. The DPA scheme rewards those corporates with whom the SFO agrees to negotiate with the opportunity to avoid a criminal conviction in exchange for a negotiated penalty and remediation. Interestingly, while there was clearly a very high degree of co-operation and the provision of so called ‘first accounts’ of interviewees, there appears to have been no waiver of privilege by the respondent bank.

The SFO knew that the first DPA would not only be heavily scrutinised internationally, but also that it needed to set a clear standard for the future conduct of such cases. The case put before the Court on Monday fits that bill and as such was a safe case for the SFO to bring, being a single historic transaction by a subsidiary of a bank now taken over by another bank where no individual criminal cases will result.

It was a serious case of bribery. Standard Bank accepted that an associated bank in Tanzania was guilty of bribing a Tanzanian public official in connection with a tender to finance energy, transport, water and sanitation plans. The bribe of $6 million was paid to an entity chaired and substantially part owned by Mr Harry Kitilya, Commissioner for the Tanzania Revenue Authority (an advisor to the government) in March 2013. The bank accepted that it did not have adequate systems in place to prevent its associate bank committing this act of bribery and therefore was guilty of an offence under Section 7 of the Bribery Act 2010.

This DPA will not be followed by criminal charges against individuals. A DPA in the UK is only available to corporates, a feature which distinguishes the UK and US versions of the procedure. This has led to the concern that corporates will ‘throw their executives under the bus’ when seeking to negotiate a settlement for themselves. In this case, a finding under section 7 of the Bribery Act 2010 required no conviction of individuals in the UK (in contrast to other offences in the Bribery Act 2010). A UK executive was interviewed under caution but there was insufficient evidence to charge. The Tanzanian bank and executives would have been guilty of an offence but for jurisdictional bars.

The financial penalties agreed were substantial relative to the size of the bribe. While the ability to avoid a criminal conviction but to agree a fine, and therefore have certainty was a key driver behind the introduction of DPAs, the level of fine is, by statute required to be comparable with a guilty plea.  In other words, the legislation only permits the Court to approve a fine which it would have approved if the entity had pleaded guilty at trial. This has led many to question why a corporate would enter a DPA.

In this case, not only was the fine clearly comparable with what a Court would  have awarded on sentencing, it appeared to be at the higher end of the range set out in the guidelines which Courts are required to follow. New sentencing guidelines for corporate offenders were released by the Sentencing Council this year in response to a request that the sentencing be codified in advance of the introduction of DPAs. It may be assumed that a great deal of negotiation between the SFO and the bank centred on where the case fell within those guidelines. In cases of bribery the guidelines require an evaluation of gross profit, in this case $8.4 million, as the benchmark by which the fine is calculated. Once the Court has determined the gross profit it will evaluate the level of culpability as either low, medium or high. The first stage of the fine’s calculation involves multiplying the gross profit figure by between 100 – 400%, depending on where the culpability falls on the low to high scale. Next the Court is required to determine of whether aggravating and mitigating features, reflecting seriousness, increase or decrease the fine within the range. Finally the court will step back and consider whether there are other factors which justify moving the fine up or down and, if there has been a guilty plea, discount the fine by 30%.

In a further illustration of the distinction between DPAs in the US, which receive little or no judicial scrutiny, and the UK version of the procedure in which the deal requires judicial sanction, Leveson and the parties reached different conclusions on the calculation of the fine. The SFO and the bank agreed that the bank’s culpability was in the medium range because despite bribery being serious offence, this offence was unintentionally committed by the bank, i.e. there was no evidence that executives of employees of the bank knew of the bribe. Leveson concluded that the level of culpability was high because of the bank’s inability to properly police the risk present in an evidently high risk transaction. In relation to seriousness, the SFO placed the offending at the higher end of seriousness because of the serious level of failings in circumstances were enforcement measures were in train (relating to an unconnected FCA investigation). In contrast, Leveson placed them at the lower end of seriousness in light of the voluntary and prompt self report and the suggestion that these failings were not widespread within the organisation. Ultimately, the disagreement between Leveson and the parties came to nothing as they both concluded that the fine should be 300% of the benchmark figure (reduced then by a third to reflect the guilty plea).

What is clear from this DPA is that a self reporting company will receive no special leniency (and is prohibited by statute from doing so) in relation to the financial penalties which it will incur. The real benefit then, of this agreement is what is not found in the agreement but what must have been negotiated concerning the process of reaching it. To those considering a similar resolution the real advantage will be the speed and agility in which this deal was reached.  Solicitors for Standard Bank contacted the SFO in 2013 (before DPAs were permissible but around the time the Bill introducing them received Royal Assent). Two and a half years may seem a long time but it compares favourably to the length of a traditional investigation and prosecution, especially when you consider that as the first of its kind, negotiations must have been painstaking.

The real coup for Standard Bank is that the first that the public heard about this investigation was when the formal agreement to the DPA was announced on Friday of last week. The SFO routinely announces its investigations to the press and on its website. Such announcements lead to uncertainty for businesses, their staff, shareholders and customers. The agreement not to publish the investigation into Standard Bank must have been something which the bank sought and the SFO acceded to. Standard Bank reported that they were co-operating with an “ongoing investigation in relation to an historic DCM transaction” in their 2014 accounts but the press appear to have overlooked it. Commercially, the ability to conclude the investigation without the fear of regular progress reports being issued by the SFO or press interest must be of huge importance.

David Green will consider this deal to have been a success for the SFO; a serious case resolved with high fines and promises of cultural change. Will there be many takers for this new procedure? There is no doubt that this was a relatively simple case of its kind and there will be others where the courts will be reluctant to approve agreements which appear too lenient or which are based on inadequate independent investigation. It remains unattractive in many ways, not least in the exposure to huge fines and costs but also, as will inevitably happen in future cases, the criminal prosecution of individual employees and directors. In cases where a DPA is to be followed by a trial of the directors, the corporate will not benefit from the short sharp snap of bad publicity that has been achieved in this case.