A few days ago, a high profile case brought by The Serious Fraud Office (SFO) against three senior executives of Barclays Bank charged with conspiracy to commit fraud and providing unlawful financial assistance, ended in the acquittal of all three defendants. The case followed the SFO’s failed attempt to bring a criminal case against Barclays itself based on the same events. The SFO has also failed to secure a single conviction against an individual following any of the five Deferred Prosecution Agreements (DPAs) which it has entered into with UK companies since the system was first introduced seven years ago by the Crime and Courts Act 2013. But this absence of successful prosecutions disguises an underlying reality which is that senior managers remain exposed to liability and reputational risk at a much earlier stage in the criminal process.
There is a common and understandable assumption among company directors that, provided they have not been dishonest, they will be looked after by the companies they serve. They rely on a company both to indemnify them in respect of any liabilities they many incur and to buy adequate D&O insurance on their behalf. While the interests of the director and the company coincide and provided the company remain solvent, this reliance is perfectly reasonable. It is where there is scope for divergence of interest that dangers may lurk.
Background
Since the financial crisis in 2008, there has been a relentless focus by regulators and prosecutors on the theme of personal accountability at board level. The enhanced risk of follow on prosecutions against individuals after a company has admitted a relevant offence has been recognised ever since this new weapon was first introduced into the SFO’s arsenal. The temptation on a company which has unearthed probable criminal activity to enter into a DPA can be considerable since it offers an opportunity to protect its reputation, pay a fine, limit legal defence costs and move on. Unlike in the US, there is no equivalent of a DPA for individuals in the UK (although there has been some suggestion that they may be introduced in the future). A problem associated with this disparity is that the “stay of out jail” cards which DPAs offer companies, come with a specific price tag which is “cooperation” with the SFO. This term carries a specific meaning. In Guidance on this issue with respect to DPAs the SFO state:
“Considerable weight may be given to a genuinely proactive approach adopted by P’s management team when the offending is brought to their notice….. Co-operation will include identifying relevant witnesses, disclosing their accounts and the documents shown to them. Where practicable it will involve making the witnesses available for interview when requested. It will further include providing a report in respect of any internal investigation including source documents.”
The danger for individuals
DPAs provide plenty of scope for divergence of interest between a company and its directors. In practice, in order for a company to avail itself of the considerable advantages of entering into DPAs, the “cooperation” required will extend to making available to the SFO, both oral and documentary evidence of those directors and other senior managers whom the SFO may wish to investigate. The product of the company’s own internal investigation must often also be provided on the basis that any legal privilege which the company may have over such reports is waived. The question as to whether any such individuals may later be interviewed as suspects or indeed prosecuted is almost always deferred and addressed as part of a separate investigation commenced after any DPA is agreed and sanctioned by the Court.
There is no mechanism under which the individuals potentially affected by a DPA are consulted by either party to the proposed agreement. For obvious reasons, their agreement would be unlikely to be forthcoming. That does not mean ,however, that they do not need an ability to secure access to independent legal advice and representation at an early stage. Without access to such advice it may be that unwise or incomplete answers given by them to questions raised in the context of internal company investigations are later used as evidence against them. If the decision to prosecute is taken, in a sense the directors have already lost. This is because, even if ultimately acquitted, they will have been subjected to the intense pressure of criminal proceedings and will have needed to access often very significant funds to mount their defence.
A Salutary Tale
In January 2019, a prosecution against a number of senior managers of Tesco the well-known high street U.K. food retailer for fraud and false accounting collapsed. The case concerned the restatement by the company of its financials following disclosure of the fact that there had been a £250 million overstatement of its profits in the 2013-14 accounting period. The criminal offence which the company successfully persuaded the Court to defer in relation to this restatement was an offence of false accounting contrary to s.17 of the Theft Act 1968.
The director of the SFO stated he was satisfied that there was a realistic prospect of conviction of this offence. This was based on the allegation that the U.K. finance director was personally responsible for the truth and accuracy of the financial data submitted to head office, and that both he and others “were also aware of improper recognition of commercial income” but that despite the opportunity to put things right “….they failed to take any of these opportunities and instead concealed the true position”. The company paid a fine of £129 million in respect of the offence. The judge in the subsequent criminal trial against the individuals who were supposedly guilty of this offence directed the jury to acquit on the basis that the evidence was simply too weak.
Conclusion
Just because there have not yet been any successful DPA follow on prosecutions against individuals, this does not mean that the potential for them is not a cause for concern. Especially in the wake of the Barclays acquittals, the SFO is under intense scrutiny and will be keen pursue what it considers to be appropriate prosecutions against individuals. As the SFO put it themselves in the press release on the Barclays case:
“Our prosecution decisions are always based on the evidence that is available, and we are determined to bring perpetrators of serious financial crime to justice. Wherever our evidential and public interest tests are met, we will always endeavour to bring this before a court.”
The name of the game is to avoid being caught up in criminal proceedings in the first place. Whilst that may not always be possible, access to the right legal advice at an early stage might make a significant difference. The Barclays case took eight years to bring to trial and the SFO costs alone are estimated at £10 million. Perhaps the key take away for senior managers is that there is real value in taking personal responsibility at the time of their appointment for gaining an understanding of the triggers for and limitations of legal representation costs cover under both the company indemnity and D&O insurance policy.
The contents of this publication, current at the date of publication set out above, are for reference purposes only and set out the views of the author. They do not constitute legal advice and should not be relied upon as such. Specific advice about your particular circumstances should always be sought separately before taking any action based on this publication.