Every Little Helps With a DPA

April 28, 2017

Lord Justice Leveson approved Tesco Store Limited’s (“Tesco”) Deferred Prosecution Agreement (“DPA”) on 10 April 2017, making them the fourth company since November 2015 to enter into a DPA with the UK’s1 Serious Fraud Office (“SFO”). This draws a line under the SFO’s probe into allegations of false accounting by Tesco after they admitted to overstating their profits by £326 million in 2014. 

DPAs are a tool available to selected prosecutors including the SFO that allow companies to defer criminal prosecution for a limited period of time by agreeing to certain conditions in hope of discontinuance, such as paying a fine and remediation measures which may include the implementation of enhanced compliance measures. 

In the aftermath of Tesco’s DPA, we consider how the SFO’s approach to DPAs has developed since they were first introduced and what companies facing investigation by the SFO should consider when deciding whether to seek a DPA. Finally, we assess what the future holds for DPAs in the UK. 

Tesco's DPA 

Notably, this is the first DPA which does not relate to bribery offences. The Tesco DPA relates to false accounting practices whereby Tesco overstated its 2014 profits by £326 million due to the company’s incorrect booking of payments it received from suppliers. From the information currently available, the key points from Tesco’s DPA are: 

  • Tesco is to pay a financial penalty of £129 million and the SFO’s costs; 
  • Tesco has already undertaken an extensive programme of change, including changes to its leadership, structures, financial controls, partnerships with suppliers and the way in which the business buys and sells; and 
  • the DPA only applies to Tesco and not to its parent company, Tesco PLC. However, an SFO press release stated that, subject to compliance with the DPA, the investigation into Tesco PLC had concluded. 

Despite the investigation into the company coming to an end, the SFO investigations continue into three former executives who are due to stand trial in September 2017 in connection with the false accounting practices. Only once this trial has concluded will further details on the DPA, the statement of facts and the judgment approving the DPA be published. 

Concurrently with the SFO, Tesco was dealing on other fronts with other regulators. This was the first DPA in which the misconduct touched on both criminal and regulatory spheres, and interestingly, there appears to have been effective co-ordination between the Financial Conduct Authority (“FCA”) and the SFO. On the same day as the agreement to enter into the DPA was made public, Tesco PLC announced that it agreed with the FCA finding of market abuse in connection with the profit misstatement. The FCA’s Final Notice evidences the co-ordination between the criminal and regulatory authorities, stating that Tesco’s DPA related to “substantially similar conduct…to that described in this Final Notice”. By concluding their investigations simultaneously and allowing Tesco to make a joint market announcement, Tesco avoided effectively being punished twice for the same misconduct. The FCA did not impose a fine as part of the settlement and noted Tesco’s “exemplary” co-operation. Instead, the FCA required Tesco and Tesco PLC to pay compensation amounting to £85 million to its shareholders who purchased Tesco’s shares and listed bonds between August and September 2014. 

Earlier, in January 2016, the Groceries Code Adjudicator (“GCA”) – known as the grocery market watchdog - also found that Tesco had, amongst other things, deliberately delayed payments to its suppliers in order to boost profits and ordered Tesco to implement a number of recommendations in the way it deals with its suppliers. It seems that the GCA would have fined Tesco for its actions but Tesco’s misconduct occurred before the GCA’s power to levy fines came into force. 

Development of the SFO's approach to DPAs 

Three years after the inception of the DPA in the UK and four DPAs later, the circumstances in which the SFO may be minded to offer a DPA are becoming clearer: 

ICBC Standard Bank - The SFO entered into its first DPA with ICBC Standard Bank’s UK subsidiary (“Standard Bank”) in November 2015. This concerned Standard Bank’s failure to prevent bribery in Tanzania by its former sister company through the actions of its executives. The key points to note in favour of the DPA were: 

  • the judge gave considerable weight to Standard Bank’s prompt (almost immediate) self-report and its extensive co-operation with the SFO; and 
  • there was a change in corporate ownership which meant that the company in its current form was effectively a different entity from that which committed the offence. 

Under the DPA, Standard Bank paid $6 million in compensation to the Tanzanian government, $8.4 million in disgorgement of tainted profits, a $16.8 million fine (following a 33% discount) and the SFO’s costs, as well as submitting to a review of its anti-bribery policies.

 XYZ Limited (“XYZ”) – The second DPA concerned a small but important group of XYZ’s employees and agents involved in offering and/or paying bribes to win overseas contracts over an eight year period. The following factors weighed in favour of a DPA: 

  • immediate self-reporting by XYZ; and 
  • XYZ’s behaviour during the investigation, including instructing lawyers to conduct an internal investigation and disclosing the results of the investigation to the SFO. 

XYZ paid disgorgement of gross profits amounting to £6,201,085 and a financial penalty of £352,000 (following a discount of 50%, which reflected its self-report and co-operation). The financial penalty was smaller than would ordinarily have been imposed for offending of this kind and XYZ was not required to pay the SFO’s costs, due to the court’s wish to protect the interests of innocent stakeholders as any greater fine would have pushed XYZ into insolvency. 

Rolls-Royce Plc and Rolls-Royce Energy Systems Inc. (“Rolls-Royce”) – The relevant offences indicted against Rolls-Royce included failure to prevent bribery, conspiracy to corrupt and false accounting. In support of securing a DPA, Rolls-Royce showed “extraordinary co-operation” after the investigation had commenced, which mitigated its failure to self-report in favour of a DPA. 

This high level of co-operation enabled Rolls-Royce to obtain a 50% discount on its penalty, reducing it to £239 million. Rolls-Royce also had to pay disgorgement of profits amounting to approximately £258 million and the SFO’s costs (£13 million), and complete a compliance programme following the recommendations of a review commissioned by Rolls-Royce. 

It would be too simplistic to say that the need for companies to self-report has gone and companies can rely on “extraordinary co-operation” like Rolls-Royce to secure a DPA. Rather, there are a number of factors which the SFO will consider in offering a DPA and, as a minimum, companies seeking the option of a DPA would be well-advised to always consider self-reporting and co-operating with the SFO. The SFO has shown that securing a DPA is not a ‘tick box’ exercise and each case will be determined on its facts, with a company’s actions being assessed in the round. 

Is a DPA worth it? 

A company’s decision to embark upon the pursuit of a DPA is by no means straightforward. Whilst companies may often desire a DPA to avoid the prospect of criminal prosecution and conviction, there is no guarantee that the SFO will offer one, even if a company has provided the pro-active and considerable assistance required in the form of self-reporting and co-operation with the investigation. Companies will need to weigh up whether the prospect of obtaining a DPA and the incentives on offer are worth their effort. 

There are a number of good reasons for companies to desire a DPA rather than running the risk of criminal prosecution and conviction, including:

  • a DPA avoids an expensive, time-consuming and public trial process; 
  • a DPA may mitigate or prevent ancillary consequences of a conviction, including mandatory debarment from public procurement processes; 
  • co-operation by the company in attempting to secure a DPA may be rewarded with a discount to the financial penalty, and recent DPAs have shown the discount under a DPA to be considerably greater (50% for both XYZ and Rolls-Royce) than the statutory maximum available for an early guilty plea at trial (33%); and 
  • concluding the SFO investigation as soon as possible (in the form of deferred prosecution) is key in terms of providing certainty to the company’s shareholders and in a bid to bring some stability to its share price. 

However, the SFO requires a significant level of co-operation before inviting a company to enter into the DPA negotiation process. It is useful for companies to note the guidance provided by the Rolls-Royce judgment on what “extraordinary co-operation” looks like in practice: 

  • voluntary disclosure of internal investigation findings; 
  • maintaining open channels of communications with the SFO regarding the investigation, including consulting the SFO in relation to remedial measures and other actions which may affect the SFO’s follow-on prosecutions; 
  • co-operating with the SFO in relation to the recording and conduct of interviews; 
  • consulting with the SFO prior to taking decisions to close or otherwise cease the operations of its subsidiaries, or take other actions which may negatively impact the SFO’s investigation; and 
  • consulting the SFO before engaging with the press or national governments in relation to the investigation. 

The company is also likely to have to undertake a number of substantive, ongoing, costly and time-consuming remediation measures, which may include: 

  • implementing a comprehensive review of its compliance policies and procedures; 
  • making changes to personnel including its senior management; 
  • co-operating with ongoing global investigations; and 
  • appointing a monitor for a fixed period of time. 

Even when DPAs are offered to companies, this is unlikely to spell the end of the probe into the matter. Whilst the company will have deferred prosecution for a limited period of time on a conditional basis in hope of discontinuance, the SFO has shown that it is still very interested in pursuing senior managers who may be individually accountable for the misconduct. Take Tesco for example. The company’s DPA has been agreed but three former senior executives will face trial in respect of the false accounting practices in September 2017. Senior management will certainly not be in a hurry to provide extensive assistance to the SFO in an attempt to secure a DPA when they are likely to be dismissed from their positions and, as individuals, continue to stand in the SFO’s firing line well after a deal is done for the company. 

What does the future hold for DPAs? 

The lengthy process involved in attempting to secure a DPA will not suit all companies, especially in the knowledge that the SFO may ultimately not choose to offer a DPA. Companies will need to weigh up the advantages and disadvantages, as outlined above, before deciding to embark upon attempts to secure a DPA. 

David Green, the SFO’s Director, warned on 2 April 2017 that DPAs should not be considered the “new normal” as DPAs are only used in “very specific circumstances”. More companies will need to be prosecuted in the months and years ahead to substantiate this view, although it should be noted that Sweett Group PLC has already been successfully prosecuted by the SFO for its misconduct. 

However, looking at the steady use of DPAs in the UK to date, and the size of the financial penalties levied, it suggests that they are here to stay and will become more commonplace as time goes on. They provide the SFO with flexibility in dealing with corporate offenders and this trend may only increase if the UK Government’s recent consultation which proposed broadening corporate criminal liability for serious economic crimes - including an extension of the “failure to prevent” model - gets the go ahead. 


1) Throughout this article we refer to the UK when in fact primarily we are referring to England and Wales.

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