Corporate crime: 2015 in review and how it may inform the future

2015 was a year of significant developments in the corporate crime arena. Jeremy Summers, Osborne Clarke’s Head of Business Crime, takes a look back at the year and explains how it may inform the future.

Key headlines were:

• The first conviction after trial in the LIBOR investigation.
• The first use of a Deferred Prosecution Agreement.
• The first use of the Bribery Act section 7 offence of failing to prevent bribery.
• The government deciding against extending the section 7 offence to create an offence of failing to prevent economic crime.
• A more aggressive approach by the Serious Fraud Office in relation to independent legal advisors representing witnesses in corporate investigations.
• The USA (for a change) following the UK: the Yates Memo and the new US approach to individuals.

LIBOR

In August 2015, after a nine week trial, Tom Hayes was convicted of eight counts of conspiracy to manipulate the Yen LIBOR rate whilst working both at UBS and latterly Citibank. He was sentenced to a total of 14 years’ imprisonment. Hayes unsuccessfully appealed his conviction but was able to persuade the Court of Appeal to reduce his sentence to 11 years.

In its reasoning, the Court of Appeal held that:

“The culpability was high and the harm serious. A deterrent element was plainly required. However, we are of the view that taking into account all the circumstances (in particular his age, his non-managerial position in the two banks, and his mild Asperger’s condition), that the overall sentence was longer than necessary to punish the appellant and to deter others.”

Looking to the future, Hayes ran a defence that his conduct was known about, was condoned and was industry-wide practice. As such, he had not been dishonest. That was rejected both at first instance and on appeal. The courts are clearly signalling a determination to take a robust approach against wrongdoing in the financial sector and prosecutors such as the SFO will doubtless be encouraged by that approach.

By noting Hayes’ non-managerial status, the Court of Appeal also left the door very much open for lengthier sentences to be imposed on those in senior positions.

DPAs

The SFO has been able to deploy Deferred Prosecution Agreements (DPAs) since February 2014, but the first DPA was only announced on 29 November 2015 (ICBC Standard Bank), although another is anticipated in early 2016.

The case involved corruption in Tanzania. Although it was not suggested that Standard Bank in London had participated in any improper conduct, it accepted that it did not have in place adequate procedures to prevent bribery on the part of its Tanzanian sister company. It did not assert that it could rely on the statutory defence provided under section 7 of the Bribery Act 2010.

David Green QC, Director of the SFO, had previously been clear in his view that the SFO’s focus would be prosecuting corporate wrongdoing, rather than showing any enthusiasm for DPAs. He does though now appear to be more persuaded as to the use and benefits of DPAs, and it is realistic to expect more to be ordered in 2016.

Lawyers advising a company in relation to issues of criminal misconduct will need to consider whether a DPA might be an appropriate resolution and will therefore need to undertake a careful review of the DPA Code of Practice with the client. The SFO continues to stress the importance of co-operation by the company if it is to conclude that a DPA (as opposed to prosecution) is in the interests of justice. In particular, the SFO wants to see early and positive engagement, which may well include reaching agreement in advance as to the scope and methodology of any internal investigation.

A company that recognises that wrongdoing has occurred and is determined to change may well conclude that there is little downside to co-operating with the SFO. Co-operation does not have to amount to agreeing with the SFO as to the strength of its case; one can argue the merits whilst still engaging meaningfully with the SFO. There is a choice to be made between co-operation and confrontation, but in the new world of DPAs, companies may be more inclined to take the former approach, seeking the potential benefits through doing so.

Section 7: failure to prevent bribery

In December 2015 Sweett Group plc became the first company to be charged with the section 7 offence. By contrast to Standard Bank, it was not able to secure a DPA. The company has entered a guilty plea and will be sentenced in February 2016.

The underlying conduct involved corruption on the part of a subsidiary company, relating to a hotel contract in Dubai. The approach that the court takes on sentencing will be eagerly awaited and may provide further clarity as to what will be required to establish the statutory defence.

Failure to prevent economic crime

In what, given the Conservatives’ 2015 manifesto pledge, many commentators considered to be a surprising climb-down by the government, the proposed extension of section 7 offences has been abandoned. There may still, though, be a limited extension of the offence in relation to revenue offences. The government may have determined that the compliance burden that would have been placed on companies would outweigh the benefits of the extended offence.

Nevertheless, 2016 began with a robust position from SFO Director David Green, who has again called for an extension of the law on corporate criminal liability to remove the need for the “controlling mind” to be found to have criminal liability in order for a company to be found guilty of criminal conduct. As he notes, no such requirement exists in the US, where corporates are routinely prosecuted for criminal wrongdoing. In arguing for an extension of the law, Mr Green asserts:

“Not only is it important as a matter of public confidence, it also makes London and the UK a safer place to do business, inspires more confidence and makes us a wealthier country.”

The SFO’s Director has considerable support in senior circles for this view, and 2016 may yet see the issue firmly back on the political agenda.

Representation of witnesses

In February 2015, the High Court in R (Lord) v Director of the Serious Fraud Office [2015] EWHC 865 (Admin) ruled that it was lawful for the SFO to have prevented a company’s legal advisers from attending a compulsory interview of their employees pursuant to section 2 of the Criminal Justice Act 1987; the SFO having concluded that such attendance had the potential to prejudice its investigation.

In its judgment, although only obiter, the court expressed its view that there is no legal right to the attendance of a legal adviser at a section 2 interview, although it noted that it was the SFO’s policy to permit the attendance of a legal adviser, provided their attendance would not unduly delay or in any way prejudice the investigation.

The case appears to have emboldened the SFO, which is now taking a more assertive approach to the attendance of legal advisers at section 2 interviews in some cases. This has included declining to provide advance information, imposing conditions on attendance, requiring undertakings over the use to which material might be put and restricting attendance to one lawyer only, pending the outcome of a review of its policy.

Companies who wish to engage with the SFO will want to consider how far they want to push back against this approach, given the SFO’s focus on co-operation discussed in the paragraphs above.

Equally, the SFO may in time wish to revisit its stance. It can compel evidence in a section 2 interview but that evidence is not admissible at trial. For that, the SFO requires the witness to provide a voluntary statement in a different form. If such witnesses were to feel that they had been treated harshly by the SFO in the section 2 interview process, not least by being denied access to legal representation, they may be less inclined to assist the SFO on a voluntary basis at a later stage.

The Yates Memo

In September 2015, the US Department of Justice (DoJ) published a document which has become known as the Yates Memo, taking the name of its author, Sally Yates, the Deputy Attorney General. The Yates Memo makes clear that companies will only be given credit for co-operation if they provide all relevant facts relating to the individuals responsible for the misconduct, and stresses the need to focus on wrongdoing by individuals.

This is notable because it represents the exception of the DoJ following the UK, rather than vice versa. The SFO and other UK agencies, particularly the Financial Conduct Authority, have a long track record of successfully prosecuting individuals, and the DPA guidance is clear that co-operation by companies must include providing information relating to culpable employees if a DPA is to be offered. By contrast to the position on the prosecution of individuals, the UK still lags behind the US in its prosecution of corporate offenders and, as noted above, a reform of the law on corporate criminal liability remains eagerly awaited by the enforcement community.

So, what does 2016 hold?

The signs from 2015 are that we are likely to see increased activity from the SFO in 2016 in the corporate crime arena. We expect this to include prosecution of individuals (with 10 traders currently facing prosecution in relation to Euribor) and corporates. The SFO has shown, however, that for those who engage cooperatively from an early stage, it is willing to consider entering into DPAs rather than prosecute in the right cases.

Businesses may face difficult decisions particularly when full co-operation is being demanded at the earliest stages, before internal investigations have even been completed. The potential advantages of co-operation will need to be balanced against legitimate rights to challenge prosecution assertions that are disagreed, with which may include difficult decisions on privilege. What is clear is that the landscape is only going to become more challenging for businesses in 2016.