Richard Kovalevsky QC on the difficulties facing prosecutors of financial crime. 

Following the Bribery Act coming into force on 1 July 2011, commentators focused on the contention that while there was a Rolls-Royce in the garage, prosecutors in the area of corruption and financial crime were using an old Mini as the vehicle of choice. In 2012 and 2013, the sleek well-engineered machine that is the Bribery Act remained unused while the everyday patchwork of existing offences seemed to be the preferred vehicle for prosecutors.

Activity in the field of bribery and corruption is extensively reported and commentated upon in the press. In many instances, the press has highlighted either the lack of prosecutions in individual instances or the failure of prosecutions. A high-profile example is the criticism directed at the Serious Fraud Office (SFO) following what the press called its ‘botched’ dawn raid and seizures against the Tchenguiz brothers.

It is clear that there is a growing intolerance from the public and media towards financial crime, and whether as a direct result of this or not there has been increased activity by prosecutors.

Action by the SFO, Director of Public Prosecutions (DPP), National Crime Agency (NCA), Crown Prosecution Service (CPS), and Her Majesty’s Revenue and Customs (HMRC) when corruption comes to light in the UK is now expected and demanded. The fact that these agencies are held up to scrutiny when a prosecution results in an acquittal or an investigation terminates is a reflection of the importance the public attaches to what these agencies do.

It is easy to get caught up with the news of the latest decision to terminate an investigation or case. The most recent example of this was the contemplated prosecution of prominent individuals at Rolls-Royce coming to an end. In light of such decisions, it is tempting to conclude that prosecution of international corporations, or prominently placed directors and officers, is very difficult and as a result will not increase in frequency. The simple truth is that cases involving multiple jurisdictions, with huge volumes of exhibits and information, are difficult and complex.

It is informative to look at three of the largest cases since the Bribery Act came into force:

  1. The SFO discontinuing its long-running investigations into individuals concerned with Rolls-Royce.
  2. The corporate investigation into GlaxoSmithKline (GSK) being terminated.
  3. The individuals being acquitted in prosecutions related to Tesco.

Newspaper articles relating to the collapse of these cases ignore underlying points of substance. A deeper analysis of these points assists in evaluating what actually happened in terms of prosecutorial activity.

For instance, in two out of the above three investigations, deferred prosecution agreements (DPAs) had been concluded with the companies involved. These agreements involved the SFO drawing up indictments to charge the criminal conduct alleged to have been uncovered, but agreeing to defer the prosecution of those charges. The agreement to defer is negotiated between the SFO and the company. It involves both a penalty to be paid by the company to secure the deferment and the acceptance of the risk of prosecution for the original crime if the agreement is not carried out in full. If the terms of the agreement are satisfied, the criminal charges will eventually be stayed by agreement and never prosecuted.

Let us look at each case in more detail:

Rolls-Royce: If the activity of the prosecutor is to be properly reviewed then the scale of the penalty paid by Rolls-Royce must be recalled. This comprised:

  • disgorgement of profit of £258m;
  • a fine of £239m;
  • the £15m expense of introducing and running a compliance programme;
  • a settlement of $170m with the Department of Justice (DoJ) in the US;
  • a settlement with the Brazilian authorities in the sum of $25m; and
  • payment of the SFO’s costs.

Sir Brian Leveson, the judge given the responsibility of overseeing the initial legal development of the DPA, observed: ‘The total financial penalty arising out of the DPA with which I am concerned exceeds £0.5bn.’ If we were to use the level of financial penalty as a gauge of the impact of the SFO’s activity then in terms of the US and its use of the Foreign Corrupt Practices Act (FCPA), the Rolls-Royce total penalties come well within the top ten financial penalties imposed in the US.

Tesco: Under the agreed DPA, Tesco was fined £129m. Although no profit could be identified as falling to be disgorged and no investor approached the SFO with a claim for compensation, by its DPA the company exposed itself to several lawsuits in the US and the UK with two companies alone claiming losses of £212m.

GSK: Little is known beyond the announcement by the SFO that cited both lack of evidence and lack of satisfaction of the public interest criteria. Reading the announcement carefully, it appears as though the dominant feature may have been lack of evidence. It is a known feature of that investigation that it partly concerned China. In any event, the decision not to prosecute when viewed with all evidence, was a brave one and consistent with the prosecutor’s duty to fairly review both stage one and two of the Code for Crown prosecutors in evaluating the decision.

To gain perspective, it is useful to look at UK activity concerning prosecutions for corruption and the use of the FCPA in the USA. In the first ten years following the enactment of the FCPA, the DoJ and the Securities and Exchange Commission (SEC) brought ten enforcement actions against corporations. The first of these concerned a civil injunction brought by the SEC against Page Airways.

It was not until 1979, two years after the FCPA became available, that the DoJ brought its first prosecution against Kenny International Corporation. In the ten years that followed, 1988 to 1998, the number rose to 15. Over a 20-year period, the total stood at 25. In 2004, the DoJ began using DPAs to resolve enforcement actions and the number of cases has rocketed over the period since then.

What then is the likely trajectory in the UK jurisdiction?

The UK’s jurisprudence is different in its structure to that of the US. There is frequent criticism of the lack of judicial involvement and oversight in the US of the criminal process. DPAs are agreed in advance with no involvement of the court and the plea bargain system is part of the fabric of the US justice system.

In the UK, DPAs have been available since 2014 (Crime and Courts Act 2013). There is judicial involvement built in from a very early stage. A DPA will only be allowed to progress if a judge finds that it is in the public interest to allow a DPA and to do so on the terms put forward. Even then, questions of penalty are not for the parties to agree but for the court to assess and impose. There are clear differences between the two jurisdictions. Sir Brian Leveson is on record as saying that he was against the introduction of this method of disposal for corporations. The jurisprudential background is at present one of caution and careful development.

It is early days for the use of the Bribery Act and DPAs in the UK. And, there are marked differences between how financial crime is dealt with in the US and UK. Having said that, given the nature of our connected financial world, where a single transaction can cross many jurisdictions, it is inevitable that the UK will follow the US in experiencing significantly increased activity in the prosecution of financial crime. Individual investigations and cases regularly involve the engagement of law enforcement agencies and prosecutors in jurisdictions outside of the UK. Settlement of such criminal investigations and possible charges necessarily involve the engagement of all jurisdictions affected. The UK’s inherent caution, characterised by fierce judicial independence and a constitutional reluctance to cede territory to prosecutors and defence lawyers, may slow that process. But, like the tide, it cannot be stopped. As we go forward and develop both a familiarity with DPAs and their utility, there is a strong likelihood that our law will come to reflect the latitude required to encourage corporates to self-report and put historic issues in their proper place.

Looking to the UK’s other leading prosecutor, the CPS, the DPP, Max Hill QC, told The House of Lords Select Committee on The Bribery Act 2010 in November 2018 that in the last year he had authorised 13 prosecutions for corruption. In the year before that, 13 such prosecutions had been authorised. So, 26 prosecutions in two years from the agency with domestic focus and not in the lead in this field.

Sir David Green QC won the long-running battle to prevent the SFO from being subsumed within the National Crime Agency. This followed the expressed determination of the then Home Secretary (Theresa May) to achieve this and the subsequent adoption of the policy in the Conservative Manifesto ahead of the June 2017 General Election. In line with the intentions behind the Jessica de Grazia Report, Green established the agency’s reputation for taking on the most complex international financial cases that raised serious issues of criminality. Under Lisa Osofsky, the SFO’s relationship with the USA and the DoJ, FBI and SEC has improved. It is reported that there is a free up-flow of evidential material between the DoJ/SEC and the SFO after what may have been a difficult period.

The SFO, brought into being in by the Criminal Justice Act in 1987, has been increasingly active and bears the hallmarks of a maturing prosecuting agency.

It is true that the investigation into GSK was terminated without prosecution and that individual prosecutions in the Tesco case have resulted in acquittals, but what is the significance of these facts?

Prosecutions against individuals are notoriously difficult to bring. In the US, this fact was reflected in the Yates Memo (2015), which stressed that the focus was to prosecute individuals notwithstanding the difficulties encountered in doing so. The announcement by Deputy Attorney General Rosenstein in November 2018, which included a section underlining the DoJ’s stated intent on persuing individuals, shows that this recognition continues. These statements, made against a background of criticism at the low numbers of individuals prosecuted following corporate enforcement activity and settlement, are a recognition of the fact that it is not easy to secure a conviction against an individual in a complex financial case. It is not at all surprising that we in the UK are experiencing the same difficulties. It is, however, important to see this fact for what it is and not to allow this feature to obscure the underlying truth that there has been an increase in activity by prosecutors in the area of financial crime.

There is reason to think that the law may change in the near future so as to make prosecutions against companies easier to bring.

The identification principle, which requires a prosecutor to identify a criminally involved individual within a company who occupies a sufficiently senior position to be part of the directing mind and will of the company in order to bring a prosecution, has come under heavy and sustained criticism.

Prior to his departure in 2018, Green, the then director of the SFO, openly campaigned to replace the identification principle. The test goes back to 1915 and Viscount Haldane’s judgment in a civil case, Lennard’s Carrying v Asiatic Petroleum. It was further explained in Tesco Supermarkets Ltd v Nattrass in 1972 and Meridian Global Funds Management Asia v Securities Commission in 1995. It is criticised as outdated and unfit for modern business given the way in which companies are now organised and operate.

In the US, corporate criminal liability is established using the respondeat superior theory stemming from the New York Central & Hudson River Railroad Company v US in 1909. This established that the actions of a company’s employee or agent can fix the company with liability even when they disregard the rules of the company and act with criminal intent or are reckless in their behaviour.

While it is unlikely that the UK would follow the US model to incorporate respondeat superioras to corporate liability, there are signs of change as a result of the campaign for a rethink to the Tesco Supermarkets v Nattrass approach.

Section 7 of the Bribery Act, the ‘adequate procedures’ defence, starts from the position of fixing criminal liability under section 7 on a company where a person associated with it bribes another person to benefit the company. The section demands that it is for the company to establish and satisfy the criminal tribunal that the measures and procedures it had in place were adequate to protect against the actions of the associated person.

This model has been adopted in section 47 Criminal Finances Act 2017 and the offence of failure to prevent facilitation of tax evasion.

There is real reason to think that Parliament has taken notice of the argument. It is interesting to note that section 7 of the Bribery Act has provoked sustained discussion in the US as the FCPA has no such provision. In the US, the theory of respondeat superior makes such considerations irrelevant in terms of guilt but relevant in terms of mitigation of penalty. This is being questioned as possibly being too harsh.

The argument in the UK has now extended to all forms of fraud. The proposition is that corporates should bear the burden of showing that the procedures they had in place were, given the particular nature and complexity of their business, adequate to protect against what the associated person did. It is likely that we have by no means heard the last of the challenge to the identification in the UK. A change, in line with section 7 Bribery Act, to cover allegations of corporate financial misdeeds committed by persons associated with the company with the intent to secure a benefit for the company, would be a powerful weapon in the armoury of every prosecutor engaged in examining corporate criminal allegations. The argument for it has simplicity within it. It may well be that the landscape is about to change in a radical way.

In my view, the activity of the prosecuting authorities in the area of financial crime in the UK will continue to increase. While the UK’s jurisprudence is different from that of the US, (meaning that while we will not mirror the development witnessed through the activity of the DoJ and SEC), we will find that the general trend of activity will be similar.

The UK has moved much quicker than the US in the context of the latter’s use of the FCPA. If it is thought that these examples may be isolated and confined to the USA, then regards should be had to the work of the OECD in the fields of corruption and money laundering, and the general activity within all countries to tighten legislation in these areas. The significant increase in prosecutorial activity in France following Sapin II can properly be seen as part of this movement and is yet another tell-tale sign of the direction we are taking in the UK.

 

This sponsored market briefing first appeared in Legal Business Disputes Yearbook 2019, original can be found here.

 


 

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