Deferred prosecution agreements (DPAs) have been a mainstay of the recent initiatives to deter corporate offending and change companies’ behaviour. They offer corporate offenders the chance to defer criminal charges provided they comply with financial penalties and other conditions agreed with a prosecuting authority. They are intended to broaden the range of tools available to prosecutors when dealing with economic crimes (namely fraud, offences under the Bribery Act 2010 and money laundering offences). They also incentivise companies to self-report wrongdoing and are characterised as a relatively quick and certain method of disposing of criminal offending within a company.
However, the recent acquittal of three former members of Tesco senior management has raised questions as to the process of DPAs, both for companies that may be party to a DPA and for the individuals who are subject to allegations of criminal conduct.
On the 21st of September 2014 Tesco plc announced to the London Stock Exchange that its profits for the half year period in August 2014 had been overstated by £250m. Carl Rogberg (Finance Director) Chris Bush (CEO) and John Scouler (Commercial Director) and several others had been suspended the previous day pending an internal investigation. Mr Bush was a Statutory Director of Tesco Stores Ltd whilst Mr Rogberg and Mr Scouler were senior managers in the UK company.
The announcement followed an internal analysis which suggested that income had been inappropriately recognised in the previous half year having been “pulled forward” from its “proper” place in the second half of the year. Although the Financial Conduct Authority (FCA) carried out some initial investigations, in October 2014 the Serious Fraud Office (SFO) took over. Tesco were prevented from interviewing key witnesses for fear of “churning the crime scene”. The SFO instead undertook all interviews relying on the documents and material voluntarily provided by Tesco.
The three individuals were charged with fraud and false accounting in September 2016. It was alleged that they had knowingly encouraged fraud within the commercial department to inflate the profit in the first half of the year to meet the budget and had knowingly reported false figures for the August Trading Statement. Critically, it was said that the term “pull forward” was used in the UK business to describe the unlawful recognition of income in the first half of the year.
In April 2017, Tesco entered into a DPA with the SFO on the grounds there was a realistic prospect of a conviction against the company on a charge of false accounting because individuals who were the “controlling mind and will” of the company dishonestly falsified the accounts. The basis of the DPA was contained in a “Statement of Facts” that named each of the three individuals and recounted that they had dishonestly committed fraud and false accounting and detailed the manner in which the offences were said to have been committed by them. Although the fact of the DPA was made public, publication of the Statement of Facts was postponed until the conclusion of the criminal trial because it was prejudicial to the individuals.
The first trial of the three individuals in September 2017 was aborted shortly before the Judge’s summing up after Mr Rogberg suffered a heart attack. However, when the case was retried, after hearing six weeks of the prosecution’s evidence, the Judge ruled that the case was so weak that no jury could convict. The prosecution were refused permission to appeal this decision by the Court of Appeal and the terminating ruling was confirmed.
In his ruling, the Judge found that there was no evidence on which a jury could be sure that the three individuals ever knew that income had been unlawfully recognised, if indeed it had ever been. The Court of Appeal commented that “in the absence of independent accounting expertise, the prosecution were unable to differentiate between the different kinds of improperly recognised income and did not set to prove the extent of the alleged underlying fraud or the underlying breaches of the accountancy practice”
Before Mr Rogberg was formally acquitted, and therefore before the DPA could be published, an application was made by the three individuals to have their names redacted from the Statement of Facts. They further invited the court to comment on the contradiction between the DPA and the judgment of the trial Judge that there was no case to answer. The court in which the DPA had been approved held that it had no jurisdiction under the statutory scheme to revisit the DPA or the Statement of Facts and the DPA could be published as it stood on Mr Rogberg’s acquittal. The court did, however, emphasise that the individuals had not been involved in the DPA, which only related to the criminal liability of Tesco Stores Ltd and not other companies or individuals.
Mr Rogberg was the final Defendant to be acquitted. As he appeared on the steps of the court, acquitted following the finding that there was no case to answer, the DPA was published which asserted that he was guilty of fraud and false accounting.
We are now left with contradictory judgments as to the individuals’ culpability. The DPA asserts that they were guilty; the trial court found there was not even a case to answer.
Indeed, the DPA court found “clear evidence of what amounts to a serious breach of criminal law and… implicates senior management”. It concluded that “there was a realistic prospect of a conviction of Tesco Stores” based on the alleged criminality of the three individuals who represented the “controlling mind and will” of the company.
The UK DPA regime was set up with an enhancement to the US model to provide a greater degree of oversight and endorsement of the agreement by a court. In judging an agreement to be “in the interests of justice” and to be “fair, reasonable and proportionate”, the court not only appears to approve a DPA as an alternative to a prosecution, but also appears to judge that a prosecution could otherwise be brought against the company.
That is set against the ruling of the trial Judge and Court of Appeal, where it was found there was “no case to answer” after hearing all the prosecution evidence over six weeks in the forensic setting of a criminal trial. That ruling determined that the evidence did not pass the threshold on which a prosecution could have been brought against the three. This is not a case where two different courts apply different standards of proof or answer different questions. Under the UK DPA regime a company can only enter into a DPA if the evidence is such that it could otherwise be prosecuted with a realistic prospect of conviction. On the trial judge’s ruling, there was no case against the individuals, so no prosecution could have been brought against the company.
There are several reasons, inherent in the DPA scheme, that explain why this has happened and could happen again.
Firstly, at the beginning of the investigation, the SFO routinely prohibits the company from carrying out its own investigation. Unlike an individual, a company does not know if it has committed an offence. If it cannot carry out its own investigation it can only rely on the SFO’s investigation process over which it has limited knowledge, with the result that it may not be aware of all the material, including exculpatory evidence.
More importantly, a DPA does not involve any adversarial process. By the time of the first court hearing, both parties have resolved to enter into the agreement. For the SFO, it benefits from a quick and complete “win” with a fine equivalent to that following a conviction. For the company, it provides a relatively speedy, cheap and certain resolution. As an arbiter of the public interest, the DPA court is entirely in the hands of the two willing participants urging the same resolution, including the assessment of the standard and quality of the evidence and whether it exceeds the threshold to bring a prosecution. In the Tesco case, the court was provided with “two lever arch files” of evidence. In contrast, at the individuals’ trial, there were several hundred volumes of evidence and, as was shown through the testing of that evidence, the case theory was shown to be inadequate.
Lessons for companies considering entering into a DPA
A key aim of DPAs is to encourage companies to engage more with the UK prosecuting authorities to self-report wrongdoing, while offering certainty or an early closure to criminal matters and better outcomes to victims. They also limit any collateral damage (e.g. negative press exposure, or employee redundancies).
But, where a company pays a substantial fine and enters into the potentially onerous terms of a deferment, it needs to be sure that such a step is taken on a proper basis. The fact that a company risks discovering, in a subsequent criminal trial, that it might not have been guilty of any offence, demonstrates the difficulty and complexity involved in taking the decision to choose the DPA route.
As a result, there is a growing argument for companies to be able to investigate allegations of criminality themselves, at least in conjunction with the SFO. A company should be able to conduct its own inquiry to determine whether it has committed an offence and to understand whether behaviour was commercially defective or actually criminal. If the SFO relaxed its prohibition on internal inquiries and allowed companies greater access to, and involvement in, the SFO investigation, any exculpatory or confirmatory evidence might be better understood.
Implications for individuals
The problem is starker for individuals.
The appearance of naming and judging those individuals in the DPA and Statement of Facts before a full review of the evidence in a criminal trial is highly unattractive. Indeed, in the three preceding UK DPAs, Standard Bank, XYZ, Rolls-Royce, the culpability of individuals was either not specifically mentioned or the individuals’ names were anonymised.
Unless there is to be a greater opportunity for a forensic review of the evidence in a quasi-adversarial setting, the DPA court should step back from declaring there to be sufficient evidence to prosecute named individuals based only on the assertions of the company and SFO.
In the Tesco case the court stated that “the [SFO] investigation … has revealed clear evidence of what amounts to a serious breach of the criminal law and without reaching any conclusion (which in light of the criminal prosecutions that are presently being pursued at the time of this Judgment is still to be determined) implicates senior management.” (emphasis added). The Judgment is written in terms which appear to endorse the Statement of Facts in which individuals are named and their alleged criminal actions are set out in detail. For instance, in assessing the seriousness of the offence the court found that “Tesco’s stores, through senior management, played a leading role in what was organised and planned misconduct, involving other employees through the application of pressure.” The court specifically noted that the Statement of Facts and the DPA “is not a private arrangement but requires both provisionally before the final agreement is reached and after such agreement, the approval of the court.”
Therefore, in order to protect the integrity of the court ruling it should be made plain that the court’s finding that a DPA is “in the interests of justice” and “fair, reasonable and proportionate” applies only to the decision to prefer a DPA over a full prosecution and is based on the assumption, rather than a finding, that the evidential test for a prosecution has been satisfied.
For individuals who may be affected by a DPA, there are strong grounds for suggesting that the court should, at the very least, ensure that the Statement of Facts is sufficiently anonymised unless and until there is a conviction of individuals. It would also help if mechanisms existed by which the form of a DPA can be revisited and/or amended in order to protect the reputation of individuals in the event of a subsequent acquittal.
It is essential that companies considering a DPA have confidence that the process will provide certainty, consistency and finality. Equally, there is an overarching requirement that the truth or otherwise of the allegations will be laid bare so that the system operates fairly on individuals. For DPAs to succeed in the minds of the public and all the immediate stakeholders, remedial action has to be taken to improve the process. The lessons from Tesco should not be ignored.
This article was first published in IFLR on 20 February 2019.