Encouraging the self-reporting of corporate wrongdoing and motivating responsible corporate citizens has a number of significant benefits.
Encouraging the self-reporting of corporate wrongdoing and motivating responsible corporate citizens has a number of significant benefits. When consulting on the introduction of Deferred Prosecution Agreements in 2012, the UK government outlined obstacles to successfully tackling economic crime, such as legal difficulties in proving corporate criminal liability and long, complex adversarial criminal proceedings. Self-reporting means that more offending can be identified, addressed and remedied with greater speed and efficiency. The creation of Deferred Prosecution Agreements has gone some way to promote self-reporting, but greater certainty and more compelling incentives are required to transform corporate behaviour.
The decision to self-report
Whether or not to self-report corporate offending is a crucial and complex decision. A company needs to consider the various continually evolving risks and incentives applicable to its individual circumstances.
The incentives generally relate to the potential to limit the likely impact. For example, a company that self-reports may achieve a Deferred Prosecution Agreement in relation to certain financial offences. A Deferred Prosecution Agreement can reduce the financial penalty by around 50%, avoid a criminal conviction (and associated operational consequences) and lead to a quicker resolution. There is also likely to be less reputational damage from press reporting of the incident compared to a prosecution and conviction.
However, there is no certainty regarding the outcome of self-reporting, including whether a Deferred Prosecution Agreement will be offered or approved. A self-reporting company can find itself prosecuted for serious criminal offences, having handed over crucial evidence. This may be evidence that a regulator would have struggled to obtain using its evidence gathering capabilities or analyse without assistance (insight into enormous modern datasets can be key) or regarding an issue which may never have come to light.
A significant factor in the decision-making process is the likelihood of an issue being reported by others or becoming public, with potentially more severe repercussions. The Serious Fraud Office (SFO) recently said that it had “heard loud and clear from our colleagues in the US how valuable co-operators can be in cracking white collar cases” (Lisa Osofsky, 28 November 2018). Informants could lead to a greater risk of prosecution. However, individuals can face similarly uncertain incentives as companies when deciding whether to cooperate; will they face prosecution (immunity is currently rare) and, if so, what impact will their assistance have on their sentence (a sentencing court may take their assistance into account)? It is unlikely that there are currently sufficient, or sufficiently certain, incentives to dramatically promote informants.
Timing of a self-report is critical. A company faced with a potential compliance issue will firstly want to investigate and identify whether the concerns are real. Sufficient time will be needed to properly explore the veracity of any issue and take appropriate advice. A Deferred Prosecution Agreement will generally only be available following a “genuinely proactive approach” involving self-reporting within a “reasonable” timeframe (see the Deferred Prosecution Agreement Code of Practice), although, in the absence of proactive self-reporting, “truly exceptional” cooperation may still achieve a Deferred Prosecution Agreement (for instance, in the case of Rolls Royce).
The position in all jurisdictions and with all regulators needs to be considered simultaneously, with self-reports coordinated appropriately when necessary.
A company considering self-reporting will understandably want to know what is expected and what it is likely to achieve.
The SFO’s previous guidance regarding self-reporting indicated that a civil outcome was likely (“we want to settle self-referral cases…civilly wherever possible”). The current guidance omits this starting point and makes clear that self-reporting is one factor to be considered and no guarantee that a prosecution will not follow.
What amounts to full cooperation for an effective self-report is also uncertain. Following the ENRC case, recent comments from the SFO director suggest that whilst legal professional privilege is acknowledged to be a fundamental right, waiver in relation to initial investigative material is a strong indicator of cooperation. The parameters, timing and significance of waiver (and the ramifications of non-waiver), in terms of the likelihood of obtaining a Deferred Prosecution Agreement, are currently unclear.
Prospects of conviction
Recent high-profile acquittals and decisions not to prosecute associated individuals may also have an impact on the decision to self-report or not.
Fraud and other mens rea offences (e.g. offences involving dishonesty) require the prosecution to prove that an individual who was a ‘directing mind’ of the company committed the offence to attribute guilt to the company. If such a sufficiently senior individual is not guilty, neither is the company. Accordingly, failures to secure individual convictions for these offences could lead to companies questioning whether self-reporting to attempt to achieve a Deferred Prosecution Agreement is a desirable option.
Future developments will inevitably continue to shape the complex self-reporting decision.
We expect to see continued calls for the extension of corporate criminal liability through the ‘failure to prevent’ model. Failure to prevent offences (for example, failing to prevent bribery) are an extension of the criminal law which attribute corporate criminal liability without the ‘directing mind’ requirement. The government’s post-consultation views are expected this year, although further delays would be unsurprising bearing in mind the current political agenda.
We may also see continued calls for Deferred Prosecution Agreements for individuals or other measures to bolster the incentives for cooperating individuals.
Measures to reinforce the ‘stick’ may be considered but what more could be done to make the ‘carrot’ attractive when tackling the unique challenges posed by corporate offending?
Increased discounts on financial penalties for self-reporting appear unlikely in the short term. The Select Committee on the 2010 Bribery Act recently concluded that discounts on financial penalties of no higher than 50% would not deter self-reporting. This view placed emphasis on the supplemental benefit of avoiding of a criminal conviction; a factor which varies in importance for each company. A discount of 50% is 17% higher than the maximum credit for an early guilty plea (33%); this is unlikely to be sufficiently attractive in many cases. If companies are not suitably motivated, opinions regarding the appropriate level of discount may shift over time.
The SFO will imminently issue guidance regarding self-reporting expectations (this is understood to be months if not weeks away). Further clarity regarding what is viewed as cooperation in the context of Deferred Prosecution Agreements - including in relation to legal professional privilege - will be significant. However, it is likely that only part of the route to a Deferred Prosecution Agreement will be mapped out and considerable uncertainty will remain. The more certainty that exists, the more prevalent self-reporting will be.
Richard Reichman is a partner at BCL Solicitors LLP law firm in London.
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