Divyam Shresth Sinha
Introduction
Criminal prosecution of a big corporation results in profusion of problems in the economic landscape of a country. Therefore, countries worldwide are willing to enter into Deferred Prosecution Agreements (DPAs) with these corporates. Various countries follow different approaches in their DPA regime. The present paper briefly analyzes the DPA regimes across multiple jurisdictions such as USA, UK, France and Australia. With such analysis the paper seeks to provide a future course of action for India in case it wishes to introduce DPA in its own jurisdiction.
What is a Deferred Prosecution Agreement?
A Deferred Prosecution Agreement (hereinafter DPA) is an agreement between a corporation and government where the latter brings charges against the former, however, agrees not to move ahead with the charges. In return for not going forward with the charges, the corporations agree to certain terms and conditions. If the corporations fail to comply with the conditions set in the agreement, then the government can prosecute them. But if they comply with the conditions, then the government drops the charges. It is crucial to note at the outset that a DPA is fundamentally different from a sentence of probation. In a sentence of probation an individual is convicted, and compliance is ensured by the court. In DPA, there is no conviction by the court. It is an out-of-court settlement and the compliance with the terms and conditions is not overseen by the court.
The concept was initially introduced to help juvenile and drug offenders from adverse effects of prosecution. Later, it began to be used for corporations, especially after the prosecution of Arthur Anderson, which caused havoc in the financial sector in USA. Arthur Anderson was convicted for shredding and doctoring the documents related to audits of a company named Enron. The conviction wiped out the entire firm which constituted one of the Big 5 in the accounting industry leading to loss of tens of thousands of jobs and billions of dollars in shareholder investments and employee pensions.
Why do governments prefer DPAs?
Governments find it increasingly difficult to prosecute huge Multi-National Corporations (MNCs) as white-collar crimes have low visibility. It becomes difficult for the prosecution to collect adequate evidence to constitute proof beyond a reasonable doubt that is required for a criminal conviction. Big MNCs are politically powerful and have the financial capacity to hire top-quality defence lawyers which makes their conviction even more arduous.
Moreover, DPAs reduce debilitating collateral damages to innocent parties who did not have any part in contravention of law. It limits the damage done to investors, shareholders, employees etc. A free fall in stock prices of the company’s publicly traded shares that can be associated with a conviction can be reduced by resorting to DPA. It prevents the company from reputational harm, going insolvent, from getting debarred, loss of licensing etc.
DPAs in United States of America
Although DPAs require approval of judges, they have virtually no role in reviewing DPAs as established by various case laws in USA. Moreover, there is no standard criteria on which it can be evaluated. Interference by a judge is seen as being against the interests of the parties (defendant corporation and the prosecution) to the publicly announced Deferred Prosecution Agreement. In Securities and Exchange Commission v. Citigroup Global Markets, Inc. Judge Rakoff propounded that the interests of both parties cannot be equated with public interest. However, his decision was reversed by a higher court. Even though it was not a DPA case a similar line of reasoning is applied in DPA cases. The courts in USA are of the view that executive branch can exercise wide discretion with respect to DPAs without any judicial review of the appropriateness of the agreement. In United States v. Fokker, the court accepted the argument that due to separation of powers, the power to determine whether DPAs satisfy public interest lies with the executive and not the judiciary according to the Constitution. Moreover, the implication of the judgement in United States v. HSBC is that the powers to oversee the terms along with the implementation of DPA is solely given to executive and the judiciary has no say in that. Therefore, in light of the above-mentioned case laws, it becomes unambiguously clear that judicial review or supervision does not exist in USA. It is different from the French approach where judicial approval is mandatory for the conclusion of a DPA.
France’s Guidelines on DPA
Convention Judiciaire d’Intérêt Public (CJIP) is the Deferred Prosecution Agreement of France. It is a system where a corporation can reach a settlement agreement on a wide range of criminal offences pertaining to environmental crime, evasion of taxes, money laundering etc. The first ever CJIP was entered between HSBC Private Bank Suisse SA and the French authorities for concealing income of certain clients in order to avoid taxes.
CJIP model includes paying a fine amounting to 30% of the average annual turnover of the preceding 3 years of the corporation. Previously, this 30% turnover was calculated for the legal entity which was actually negotiating the CJIP. However, in 2023, French Financial National Prosecutor revised their guidelines and clarified that the whole company group’s turnover would now be considered. This change was incorporated to prevent companies from shifting their criminal liability to one of its subsidiary that has the lowest turnover in order to pay less fines. A company can also agree to implement an anti-corruption compliance framework headed by French anti-Corruption Agency (AFA) to prevent and detect corrupt practices for 3 years under CJIP. Moreover, it is crucial to note that the penalties for criminal and taxation offences cannot be cumulated and summed up. The cumulation cannot go beyond the higher amount of the two penalties.
A CJIP can only be concluded when a judge approves it after a public hearing. One of the unique features of this system is that the company does not need to necessarily admit guilt. Therefore, if a judge refuses to approve the said CJIP then the company can defend itself at trial. The information that is provided by the company voluntarily in course of CJIP negotiations is confidential in nature and the Public Prosecutor cannot utilize this for prosecuting further.
The Supreme Court of France in Oil for Food Case has clarified that the principle of ne bis in idem principle does not apply extra-territorially and the French courts are not restricted by any foreign judgement to apply this principle. The effect of this decision is that if a company enters into a DPA in a foreign jurisdiction then this does not bar French authorities to prosecute the company pertaining to same set of facts. However, other jurisdictions such as United Kingdom follow a completely opposite approach.
DPA Regime in Australia and United Kingdom
Australia, along with England is a follower of identification doctrine. The doctrine encapsulates that individuals who are the actual masterminds of the corporate wrongdoing are placed under the spotlight. Therefore, it is assumed that such individuals represent the entire corporation. There can be certain cases where a subsidiary of a parent company engages in corporate wrongdoing. The DPAs consist of an undertaking from the parent company. In corporate law, every subsidiary is a separate legal entity. The English law does not differentiate between a holding company and a subsidiary company for the purposes of DPAs. However, Australia regards a parent company and its subsidiary as distinct legal entities. But Australia accounts for ‘the commercial reality that every holding company has the potential and, more often than not, in fact, does, exercise complete control over a subsidiary’.
Multinational corporations with their units and operations spread across borders are often faced with prosecutions at multiple courts. There is not set standard at the international level about the situation when a DPA in one country has a restraining effect on prosecutions in other countries. UK, in its approach towards DPA, upholds the principle of double jeopardy. This means that if there is a DPA that have the same facts then a UK court will refrain from initiating prosecution proceedings against the same corporation. But some other countries particularly France and USA exercise unrestrained jurisdiction. They are not concerned with the fact that the same corporation is being prosecuted in some other jurisdiction.
Problems with DPAs
DPAs provide a way for corporations to avoid prosecution by consenting to make financial penalty payments. In addition, the corporations agree to cooperate by setting up internal compliance mechanisms and provide incriminating information about individuals who were involved in the misconduct. This internal mechanism assumes that it would be effective as the firms have access to information pertaining to an employee along with confidential information about the firm’s strategy to comprehend the actions of the employees. However, such mechanisms ignore a crucial fact that firms would only provide information about the crime government is already aware of. It curtails information about a related crime which the government is unaware of. Since the defendant’s lawyers owe an ethical duty to their clients to represent them adequately it allows the defendant company to curtail access to information. For example, in 2014, one of the Big 4 companies Pricewater Coopers was fined $25 million because it altered a report for its client (The Bank of Tokyo-Mitsubishi) which was being investigated for infringement of US economic sanctions. The US Government has been tentative in indicting the Big 4 companies as they play a pivotal role in regulating the securities market.
DPAs are a way of shielding the individuals who are behind the corporate wrongdoings. The burden of payment of the penalty is shifted on the shareholders of the corporations. Therefore, payment of penalties has no deterrent effect, particularly, in cases of corporations that have become too big to fail. Some corporations hold enormous economic power that their fallout leads to financial contagion and destabilization. This was particularly true in the DPA between Airbus and the Serious Fraud Office. One of the main reasons for allowing the DPA was that if Airbus was prosecuted and subsequently debarred then the gross domestic product of each of the US, UK, France, Germany and Spain could have fallen by over €100 billion. The government, in such situations, is not in a position to impose hefty fines for contravention of law as it knows that a large financial penalty may trigger a financial crisis. So, executives of the firm are not deterred to break the law as the firm’s failure becomes politically untenable for the government. This lack of fear has resulted in corporate recidivism among industry giants such as Pfizer, HSBC, UBS, JP Morgan etc.
Way Ahead for India
Internationally many countries such as Canada, Australia, UK etc. are moving towards introducing DPAs in their jurisdictions for inducing corporations to be transparent and self-report the wrongdoings. With voluminous judicial backlogs and difficulty in gathering evidence pertaining to MNCs, India may also consider introducing DPA in its system. However, it needs to be cautious in its approach. India must make sure that a DPA between the Indian government and a corporation is open to judicial review. India can take cue from UK in its approach where the DPA has to be declared by the court to be in the interests of justice and the terms and conditions are regarded as fair, reasonable and proportionate by the judge. Instead of relying on defendant-funded investigations, India can resort to independent and well-resourced investigation by law enforcement agencies. Moreover, it can give cooperation credit which is essentially a discount on corporate fine to corporations which invest in internal compliance system and self-report the corporate wrongdoing of individuals. Discounts on the financial penalty to be paid can be given on the inability of the corporation to pay the amount. For example, in DPA between Serious Fraud Office and Guralp Systems Ltd, a maximum discount of 50% was given to Guralp Systems Ltd because it did not have financial capacity to pay the entire amount. India can take inspiration from the French system of calculating fines based on the turnover of the group of companies to prevent corporations from placing the blame on a single subsidiary controlled by the group. It can formulate a similar framework. Moreover, while negotiating terms of settlement with a subsidiary, it should be cognizant of the fact that a parent company exercises considerable control over it. To deter individuals in corporation from repeatedly violating the law, the government must mandate imprisonment of individuals who are regarded as repeat offenders.
The author is a fourth year law student at Jindal Global Law School.
NUALS Law Journal 