This type of arrangement has been in place in the US for some time and is often used by the Securities and Exchange Commission (SEC) as a means of obtaining swift and cost-effective redress for corporate misdeeds.
In essence, the system involves a company accepting that it has been involved in wrong doing and agreeing with the prosecutor that it will pay compensation and/or fines and penalties, and perhaps also agree to an extended period of monitoring in return for a concession that formal prosecution will be dropped.
Bad Track Record for Self-Reporting
These types of agreement have been promoted in the recent past, in particular, by Richard Alderman, Director of the Serious Fraud Office. Mr Alderman has sought to encourage a culture among UK plcs of self-reporting, but the track record for prosecution agreements as a result of self-reporting has not been entirely a happy one.
The SFO prosecutions of Innospec and BAE Systems which resulted in penalties being agreed prior to presentation for approval by the Courts, resulted in severe criticism by the Courts of the procedures adopted.
The Solicitor-General has sought to learn lessons from these cases and made it clear that under the UK system, the Courts will remain the final arbiter as to whether a deferred prosecution agreement should or should not be pursued.
Treading a Fine Line
Some categories of corporate crime will always be regarded as too serious to be treated in this way. Examples might include serious fraud, bribery, corporate manslaughter and market fixing activity. That said, the line between serious and less serious can often be very difficult to draw especially at an early stage in an investigation.
Also, the temptation on companies to confess and try to avoid the full rigor and reputational damage of a criminal prosecution (particularly in cases where there has been a regime change at board level) may be considerable.
Insurance Implications of DPAs
The question as to the individual liability of board members in the context of corporate wrongdoing and therefore the insurability of that individual’s liability may well come into sharper focus with the introduction of these new arrangements.
Coverage issues which may surface as a result of this renewed focus include:
- At what point does an investigation as a result of self-reporting result in a “claim” as defined under the policy and what are the implications of this?
- If payments are made to prevent a claim in the form of a criminal prosecution being brought, would such payments constitute loss under the policy?
- Would the relevant fines and penalties be insurable?
- To what extent might the insured v insured exclusion come into play?
- Is there a risk that individual directors will be tainted with the stain of having been involved in wrongdoing without the opportunity to clear their names by an acquittal as opposed to an admission and, if so, what (if anything) can the insurance do about this?