SYDNEY: 10 May 2013 - The US remains the most influential jurisdiction in prosecuting economic crime, notably through the application of deferred prosecution agreements (DPA) and non-prosecution agreements (NPA). In a deferred prosecution, the government charges the corporation in a criminal information, which it agrees to dismiss at the end of a specified term if the corporation has complied with the terms of the DPA. Because it is filed with the court, a DPA is a public document. By contrast, an NPA does not arise from the filing of criminal charges, and the agreement will not be made public unless the prosecutors seek to publicize the result of their investigation or the company is required to disclose the agreement. 

Designed to avoid the collateral consequences associated with a criminal indictment, the US Department of Justice’s (DOJ) policy of settling cases of major corporate criminal misconduct has attracted sharp criticism from policy makers, academics and the judiciary for a number of reasons. First, there is a lack of objective criteria for determining the terms and conditions of the agreements with the process subject to complete prosecutorial discretion. Prosecutors not only investigate the potential crime, but also adjudicate on guilt and the degree of penalty. The agency determines whether to offer deferral and scopes the extent of internal governance change required and the degree of external oversight, if any. Further, the entire negotiation takes place outside the formal judicial arena, with a waiver of client attorney privilege implicitly required. The consequence is a body of ad hoc settlements with little predictive or precedential value. Second, while the benefits to prosecutors and organizations in entering a negotiated settlement are clear, the effectiveness of the mechanism itself in facilitating organisational change is not. In 2009, the Government Accountability Office released a report regarding the DOJ’s use of DPAs and NPAs, stating that 'the DOJ cannot evaluate and demonstrate the extent to which DPAs and NPAs, in addition to other tools, such as prosecution, contribute to the department’s efforts to combat corporate crime because it has no measures to assess their effectiveness.'  The opaqueness of the process, combined with unfettered prosecutorial discretion and a lack of empirical support has invigorated debate as to whether such ‘creative enforcement’ mechanisms suffer from an accountability deficit.

The most recent application of negotiated settlements relates to investigations into the widespread and persistent manipulation of the London Interbank Offered Rate where, to date, the US has levied just over $1.8 billion in penalties on Barclays, UBS and the Royal Bank of Scotland. Under the terms of the Barclays NPA, for the two year term of the agreement, Barclays must: (i) commit no US crime whatsoever; (ii) disclose non-privileged information with respect to the activities of Barclays and its agents concerning all matters about which the DOJ inquires; (iii) bring to the DOJ’s attention all potentially criminal conduct by Barclays or any of its employees that relates to fraud or violations of the laws governing securities and commodities markets; and (iv) bring to the DOJ’s attention all criminal and regulatory investigations, administrative proceedings or civil actions brought by any governmental authority in the US by or against Barclays or its employees that alleges fraud or violations of the laws governing the securities and commodities markets. No other terms or conditions were imposed.  The terms and conditions of the UBS NPA were identical, with one notable exception – the filing of criminal charges against a Japanese subsidiary of UBS. The terms of the DPA entered into by RBS were not much more substantive. Like, UBS, a Japanese subsidiary was indicted, however the only additional term was the requirement to implement a compliance program designed to detect manipulation and interbank coordination of benchmark rate submissions.

These settlements demonstrate that although a financial institution may admit to extensive and pervasive abuse of the law, prosecutorial discretion permits it to not only escape criminal indictment, but substantive governance overhauls in exchange for cooperation. The absence of rehabilitative terms and conditions questions how these settlements achieve accountability or can be deemed to be in the public interest and has invigorated debate as to how to make the deferral mechanism itself more publicly accountable and transparent.

One potential approach is offered by the UK, where the government has recently transplanted the US’ deferred prosecution model, with refinements, to incorporate a far greater level of judicial oversight, transparency and consistency throughout the process. The mechanism, incorporated into the Crimes and Courts Act 2013: (i) requires the publishing of a Code of Practice setting out the factors that prosecutors should take into account in deciding whether to enter into a DPA; (ii) sets out potential terms and conditions that may be incorporated into a DPA; (iii) requires early judicial intervention, where, after the decision to enter a DPA has been made, the Crown Court assess the potential terms and conditions and makes an order as to whether the proposed terms are ‘fair, reasonable and proportionate’; (iv) requires final judicial approval of the DPA to ensure that the terms are ‘fair, reasonable and proportionate’. If granted, the DPA would be approved in open Court to ensure openness and transparency.

The advantage of the UK approach is that an indication could be obtained at an initial hearing as to whether or not the Court considers the DPA agreement to be appropriate in principle. This preliminary hurdle may avoid some of the issues that are currently arising in the US as to what is deemed to be in the ‘public interest’. It would also provide an opportunity for the Court to question the prosecutorial methods deployed in presenting a case. However, the same factors that convince a corporation to accept an agreement – a desire to settle in order to avoid ongoing reputational risk or avoid public exposure of compliance failure – may also inhibit its willingness to challenge prosecutorial strategy, leaving a Court in a difficult position of striking out the freedom to contract on intuition rather than evidence. Although steps have been taken to improve the accountability of the deferral mechanism in the UK, only once applied will we receive any indication as to whether the refinements will either address the accountability deficit or prove more efficacious in ensuring more substantive compliance.