US vs. UK Deferred-prosecution agreements: Some history and key differences

7 August 2017

Anyone familiar with recent high-profile corporate corruption scandals in the US has at least heard the term deferred-prosecution agreement, or DPA. An article in the current issue of The New Yorker about prosecuting banks and bank executives says that from 2002 to 2016, the US Department of Justice has entered into over 400 DPAs, a remarkable number that reflects a shift in DOJ’s approach to addressing white-collar crime.

I’ll get to exactly what DPAs are in a moment, but before that a little more legal history. The New Yorker article explains that until the mid-1970s, US authorities usually targeted individuals in cases of corporate crime. After a watershed case involving the 1975 suicide of an executive, however, DOJ’s strategy started to shift towards prosecuting corporations as well individuals.

Another watershed case occurred in 2002, when DOJ convicted Arthur Andersen of cooking the books in the Enron fraud case. The conviction eventually put the venerable accounting firm out of business, which among other things cost the US economy thousands of jobs.

The article says that many came to see the Arthur Andersen conviction “as a flagrant instance of government overreach: the problem with convicting a company was that it could have ‘collateral consequences’ that would be borne by employees, shareholders and other innocent parties.” In an era of M&A and corporate behemoths, the Arthur Andersen outcome could be regarded as a cautionary tale of the dire economic consequences of meting out white-collar justice. Or, as many have put it, some companies are simply “too big to jail” if we hope to keep our economy from sliding into the abyss.

Which brings us back to deferred-prosecution agreements. DPAs are agreements between prosecutors and companies that essentially say the DOJ won’t prosecute a corporation for bribery, fraud and/or other criminal activity if it agrees to pay a fine and get its regulatory house in order. And as the first statistic quoted in this post hints, we are now firmly in the era of the deferred-prosecution agreement.

Former prosecutor and current US district judge Jed S. Rakoff addresses the subject of DPAs in the New York Review of Books article “The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?” Rakoff suggests that one chief reason for the current popularity of DPAs is that they’re viewed as a win by both prosecutors and the corporations they investigate. He writes that, if you are a prosecutor, “You are happy because you believe that you have helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched.”

The New Yorker points out that some corporations are so happy with the DPA trend that they don’t even regard it as a deterrent to criminal behavior. Pfizer, it says, flouted not one but two DPAs related to bribery and other crimes, and “after offering Pfizer a second chance, only to have misconduct continue, the government was apparently happy to offer a third.”

DPAs, then, allow executives off the hook, allow prosecutors to maintain spotless records (since they don’t have to assume the very real risk of losing criminal cases to lawyered-up corporations) and provide authorities with substantial revenue and the ability to tell the public that rogue corporations have been fined and rehabilitated.

As many (including Rakoff) have observed, this may look good — and even keep a portion of the public happy — but the trend hardly serves the cause of justice. For one thing, shareholders typically foot the bill for the fines. And, of course, executives that have enabled and/or engaged in the criminal misconduct that (in many cases) has made them fabulously rich are not held accountable. Rakoff’s article appeared in January 2014, and in it he observed that “not a single high-level executive has been successfully prosecuted in connection with the recent financial crisis.” Nearly four years later, his words still hold true and they’ll probably continue to do so for years to come, at least in the US. The New Yorker points out that “federal prosecutions of white-collar crime are now at a twenty-year low.”

Given our similar judicial systems, it is interesting — and important for US executives to grasp — that the US and UK have different DPA systems. UK authorities, in fact, have a very short history of entering into DPAs, as they were introduced just three ago under the Crime and Courts Act 2013. UK DPAs are available to the Serious Fraud Office (as well as the Crown Prosecution Service), and to date UK authorities have entered into just three agreements, in stark contrast to the hundreds entered into by DOJ.

As the SFO website explains, UK DPAs are “concluded under the supervision of a judge, who must be convinced that the DPA is ‘in the interests of justice’ and that the terms are ‘fair, reasonable and proportionate.’” In other words, a UK judge can reject a proposed DPA. Remember that US DPAs do not need judicial approval and are entered into at the discretion of prosecutors. Ben Morgan, the UK’s joint head of bribery and corruption, emphasized the importance of the court’s involvement in a March 2017 speech, saying: “This is a key and distinguishing feature of the UK DPA system. The judge is asked to give a declaration.”

This judicial approval provides greater legitimacy to the process. In what’s almost certainly a veiled reference to US DPA practice, Morgan assures his audience of finance professionals that they “will not find us at the SFO slipping into a casual, commoditized practice of processing DPAs. You will instead find us agonizing over the fine detail of each potential candidate — is it really the right thing to do this time?” Knowing that a judge will have to approve each DPA on its own merits helps ensure this kind of analysis, if not agonizing. It’s also critical to note that the judge who reviews a proposed DPA must make a public declaration, which increases the transparency of each agreement. The US DPA process has been criticized for its opacity.

In another breach with US protocol, UK DPAs apply only to organizations, never to individuals. One of the high-profile cases settled this year under a UK DPA involved Rolls Royce. Among other things, the company agreed under the DPA to pay 671 million pounds in fines to avoid prosecution for bribery, paying off rivals and other criminal behavior. The Financial Times explains that the judge who approved the DPA indicated the corruption at Rolls “went right up the ranks of senior management, and even ‘on the face of it, [the] controlling minds’ of the company.”

Unfortunately for Rolls Royce executives, the DPA does not shield them from criminal prosecution. The Times asks: “who knew what, and when, and will anyone [at Rolls Royce] be prosecuted? … And why did the leadership of the company decide not to report to authorities concerns over potentially corrupt behavior raised in 2010?” 2010 is the year that Britain’s strict Bribery Act was given assent, so, the Times observes, Rolls executives certainly knew that a “blind eye would no longer be turned to corporate misbehavior.” (The Bribery Act became effective in 2011.)

Presumably most people who don’t save their money under their mattresses will think it right and just that executives at Rolls Royce or any other corporation can be held accountable for engaging in corrupt behavior. There are, however, some vocal opponents of the UK DPA regime that allows for this. A post on the Spectator’s blog, for example, defends former Rolls Royce CEO Sir Ralph Robins against the possibility that he might be swept into the SFO’s fraud investigation of the company. The writer takes the SFO to task for disclosing the fact that it interviewed Sir Robins during the course of its investigation, damaging his “name” and reputation. The writer of the post contends: “One of the many downsides of the new [UK DPA] system is that such deals do not cover individuals. In short, the company is exempted from prosecution, the SFO gets its check – but senior employees (in this case long-retired) are hung out to dry.”

Clearly, the writer is a strong proponent of the kind of US-style DPA strategy that targets only corporations and does not hold corporate employees accountable. The counter argument can be summed up by Justice Rakoff, who writes in his NYRB piece: “under the law of most US jurisdictions, a company cannot be criminally liable unless at least one managerial agent has committed the crime in question; so why not prosecute the agent who actually committed the crime?”

This kind of individual accountability is what many people have clamored for in the wake of the financial crisis, but which hasn’t materialized, at least in the US. Just last month, however, four Barclays executives appeared in a UK courtroom to face charges of misconduct. The BBC observes: “Nearly a decade on from a financial crisis and this is the first time any former bank chief executive anywhere in the world has faced criminal charges for alleged conduct during the greatest financial crisis since the 1930s.”

Interestingly, the SFO has not extended a DPA offer to Barclays in this case. The BBC article indicates that SFO leaders insist on full cooperation from companies in the case of DPAs (see the 2017 Ben Morgan speech for evidence of this), and Barclays “withheld tens of thousands of documents citing legal privilege — behavior [SFO head David Green] described as leading the SFO ‘a merry dance.’” Instead, Barclays itself will face criminal charges. In order to obviate possible serious economic fallout similar to what occurred after the US’s Arthur Andersen case, the SFO is charging Barclays PLC, Barclays’ holding company, not operating company. The BBC explains that charging the holding company “means the ability of this important transatlantic bank to operate in its key markets should not be affected — whatever the outcome.”

The BBC notes that charging the company and its executives raises the possibility that they could each enter different pleas, and that the situation in general is “complicated territory.” Adding to the complications is the fact that the SFO is facing an existential crisis. The agency is relatively small, with an annual budget of 40 million pounds compared to DOJ’s $500 million enforcement budget for financial and mortgage fraud. And it is now in danger of being incorporated into the larger National Crime Agency. The BBC suggests that the possibility the SFO could be dissolved may have affected its decision to bring charges against both Barclays and its executives, and that the charges may be a kind of “last hurrah.”

Those who have accused US prosecutors of protecting their own careers by favoring DPAs over criminal prosecutions may find it telling that the first charges brought against executives for misconduct related to the financial crisis may have been brought in part because the prosecutors are under threat of losing their own agency.