Second UK deferred prosecution agreement finalised but bigger penalty discounts needed, says expert

Expert in anti-corruption Barry Vitou of Pinsent Masons, the law firm behind Out-Law.com, was commenting after the High Court in London signed off the second DPA put in place between a UK company and the Serious Fraud Office (SFO) on Friday.

Vitou welcomed the deal and the fact that the company involved, an unnamed SME, had benefited from a discounted penalty for admitting their involvement in corrupt practices plus an additional discount to take into account the company's reported parlous financial situation.

Under the DPA the company will hand over £6.2 million in profits made on tainted contracts and pay a fine of £352,000. The company benefited from a 50% discount on the formula applied for calculating fines, which Vitou said was more than the 33% discount companies usually obtain by pleading guilty to corruption charges at the earliest possible stage. On top of this the fine was discounted further to take into account the company's poor financial situation, resulting in a fine of £352,000.

However, he said this fine was distorted by the poor financial situation of the company. Putting that to one side in this DPA the additional discount obtained beyond what could be received by simply pleading guilty was 17%. Vitou said that discounts in excess of an additional 17% will be required to encourage more businesses to come forward and highlight corruption in their own organisation.

Vitou said: "The decision represents a win for the SFO and confirms that DPAs are here to stay. This is the second secured in recent months. Some more are likely to follow. However, as the SFO itself has acknowledged in recent weeks, increased discounts on financial penalties are needed if more companies are going to make use of the route. The outcome represents an improvement – the reduction is larger than we have seen previously, but there is still some way to go. The SFO and the courts must try harder to incentivise businesses to self report wrongdoing."

Vitou said that while the SME's poor financial position had been taken into account to reduce the level of fine imposed on the business further than had the original 50% discount applied on its own, that would "not help the average large company with a stronger balance sheet" as they "could not expect the same treatment".

"Without a more significant reduction on penalties, fewer companies caught up in wrong-doing are likely to come forward for a DPA," Vitou said. "The temptation to ‘sit it out’ in the hopes of avoiding detection will remain too great. This is a wasted opportunity. Over the last few weeks there have been clear signals from the SFO and other senior figures, including the judge who heard this case, that the need for greater financial incentives is understood. However, it seems companies can still expect to pay a premium for agreeing a DPA."

"Hopefully, common sense will prevail. As companies and the courts grow more comfortable with the DPA process, more scope for negotiation over penalty reductions should increase. Anyone considering self reporting or presently negotiating a DPA should ‘dig their heels in’ and seek a more sizeable discount," he said.

Vitou said that "more significant" DPA's should be in the pipeline. These cases "will give greater insight into how the SFO and courts are going to approach penalties going forward", he said.

DPAs are designed to encourage businesses to self-report wrongdoing in the hope of more lenient treatment. Prosecutors in the UK have had the power to put DPAs in place with corporate offenders since February 2014.

The SFO's historic first DPA was concluded late last year with ICBC Standard Bank after it was found that the company had failed to prevent bribery during a period in 2012/13. The SFO imposed financial penalties totalling more than $30 million on the bank under the terms of the DPA, as well as requiring it to cooperate with any further SFO investigations and to commission a wide-ranging independent review of its existing compliance polices and procedures "at its own expense".

Anne-Marie Ottaway of Pinsent Masons said DPAs can provide a number of potential benefits to companies.

"The agreements allow companies to avoid a full criminal prosecution and the associated reputational damage, as well as the collateral harm to third parties – such as investors and employees – which would otherwise follow," she said.