In the second of three posts on the future enforcement of U.K. financial crimes, we explore the implications of enforcement actions related to financial crime in the U.K. Read the first post here.
A handful of recent developments provide valuable clues to how U.K. enforcement of financial crimes may play out in the future. Companies falling under the jurisdiction of U.K. authorities—which, given the breadth of the jurisdiction established by U.K. Bribery Act, includes the vast majority of multi-national companies—would do well to pay attention and to make proactive adjustments to their business conduct programmes.
CLUE #3: Deferred Prosecution Agreements Authorised
Recent legislation authorising U.K. authorities to use Deferred Prosecution Agreements (DPAs) has provided an important new tool to the SFO and other U.K.authorities. Most importantly, the Code of Practice guidance that governs the use of DPAs sets up significant incentives for companies to “self-report” potential violations of the law and to cooperate fully with the government if investigated—including cooperating in the future prosecution of individuals.
Alun Milford, the General Counsel of the SFO, said earlier this year that, “if we hear of the misconduct from the company, which then goes on to co-operate in a transparent and proactive manner, then plainly the public interest factors pointing against prosecution will be more substantial and more weighty. In some cases, they will make all the difference.” In a speech on September 2, 2014, he also stated that without cooperation, it was “difficult to imagine” that a DPA “would ever be appropriate.”
As U.S. experience has shown, DPAs can allow authorities to utilise scarce resources more efficiently by deferring prosecution instead of bringing a case and taking it to a lengthy (and expensive) trial. DPAs also can result in significant fines, which then can be used to help fund further enforcement activities. Given the potential benefits to both the government and the organisation under scrutiny, it seems only a matter of time before DPAs become a common feature of the U.K. enforcement landscape.
CLUE #4: “Whistleblower” Bounties Rejected
After a lengthy study by a commission formed by the Bank of England and the U.K. Financial Conduct Authority (FCA), the commission rejected U.S.-style “bounties” for individuals who report financial crimes to government authorities. With U.S. bounties, whistleblowers who provide critical evidence in certain types of cases are offered up to 30 per cent of any recovery by the government that exceeds $1 million. As the U.S. Attorney General, Eric Holder recently stated, large bounties are seen as a way to “improve the Justice Department's ability to gather evidence of wrongdoing while complex financial crimes are still in progress—making it easier to complete investigations and to stop misconduct before it becomes so widespread that it foments the next crisis.”
By contrast, the FCA is concerned that large government awards will act as an incentive for employees to bypass their internal reporting systems and report straight to the government. In rejecting bounties, the FCA explicitly stated that it did not want to undermine internal reporting programmes. Internal reporting generally allows an organisation to identify and address problems earlier, thereby minimising the length and severity of improper conduct.
In addition, if an organisation learns of a potential violation when an employee raises a concern internally,it is better positioned to self-report the issue and cooperate with the authorities—which, through the DPA process, should result in a more favourable outcome for the organisation and a more efficient use of resources by the government.
In exactly the way the FCA would want, a major U.K. retailer recently informed the FCA that it had overstated earnings. The self-reporting occurred after the company received an “alarm bell” from an internal whistleblower and then investigated the allegation. The FCA has announced that it will be looking into the matter. Given the high profile nature of the case, as well as the fact that the retailer self-reported the overstatement and appears to be opting for transparency and cooperation, the case seems to be a good candidate for a DPA. Even if a DPA does not result, the case stands as vindication of the FCA’s preference for internal reporting over bounties.
For forward-looking organisations, the key upshot of the rejection of bounties is the emphasis the FCA put on internal reporting. As a result, such organisations will want to ensure that they have effective mechanisms in place for employees to raise concerns and be protected from retaliation. Indeed, it is expected that later this year, the U.K. commission that studied bounties will publish proposals that would require firms to do so.