Should directors worry about deferred prosecution agreements, or are DPAs just another instance of facing the right enemy but in the wrong direction?
At the start of the Second World War the Germans avoided the defensive Maginot Line and invaded France through Belgium. In 1942 the Japanese invaded Singapore from land rather than from the sea where the British guns were trained. What has this to do with the arrival in the UK of deferred prosecution agreements (DPAs) (a subject about which I have written before)?
The relevant legislation has only very recently been introduced under provisions of the Crime and Courts Act 2013, which came into force on 24th February 2014. Perhaps that’s why questions are again being raised as to whether there is a significantly increased risk of criminal prosecution for directors. I think the short answer to this is “No,” and I explain why below.
But I think the more interesting issue is whether that is even the right question, or is this instead another example of a more insidious risk for directors and executives in the UK, which is that they become caught in a prosecutory crossfire involving the company.
Deferred Prosecution Agreements
Let’s deal with DPAs first. DPAs are agreements between prosecutors and companies under which criminal charges will be filed but not proceeded with, provided there is compliance by the company with an agreed set of terms and conditions such as payment of potential fines and the implementation of mediation and/or monitoring programmes. The new regime only applies to corporates and not to individuals. It is also entirely voluntary. In other words there is no obligation on companies to accept the prosecutor’s proposal of a DPA.
Why a Company Might not Accept
Companies may consider there is a lack of incentive on them to go down the DPA route in the absence of any guarantees by the prosecution authorities that there will eventually be no prosecution and given the fact that the fines and other remedial action agreed to may be substantial. Companies may also have concerns as to the use to which the prosecutors may seek to put all the information and evidence volunteered by the company throughout the deferred prosecution agreement negotiations.
Limited Opportunity to Offer DPAs
So how likely are we to see them? As things stand, only the Serious Fraud Office and the Crown Prosecution Service have the ability to use DPAs and then only in relation to a limited class of specific financial services offences as well as more general fraud and corruption offences including under the Bribery Act. The Financial Conduct Authority does not (yet) have this ability.
More significantly, there is, in the UK, a high threshold for corporate criminal liability for offences involving intent or dishonesty. Prosecutors are required to produce evidence of senior management’s knowledge and involvement in the offence as “the directing mind and will” of the company. This is different from the position elsewhere and notably in the USA where lower thresholds apply.
Given that UK prosecutors must reasonably suspect that the company has committed an offence and have a reasonable belief in a reasonable prospect of conviction before considering deferred prosecution agreements, we are unlikely to see many in the near future. (A more dangerous development would be the implementation of proposals to lower the threshold for corporate criminal prosecutions in the case of fraud.
When Interests Diverge
So far so good—and indeed, you might be wondering what possible relevance any of this could have for directors (or their insurers).
As we have seen, DPAs do not involve individual directors. The same may also be said, for example, of the Corporate Manslaughter and Corporate Homicide Act, which is often cited in D&O policies.
To me, it’s not that cases involving serious accidents or corruption often present a direct threat to directors. It is more that these incidents provide a fertile seed bed in which the interests of the company and those of its directors and senior managers may diverge in subtle and unpredictable ways with the potential for significantly adverse implications for the individuals concerned some way down the road.
The risk in any of these disaster-type scenarios is that directors and senior managers who are involved at the heart of these crises will often need (perhaps without even realising it) separate legal representation; the company’s agenda being quite different.
It is therefore not just a question of ensuring adequate cover under D&O insurance (whatever that may look like) but also of focusing on what happens when the interests of a company and its senior executives (or some of them) begin to diverge and how to deal with that. Perhaps the subject for another day!