Legislation is expected in the first quarter of this year on deferred prosecution agreements (DPAs); and in view of the string of financial scandals in the wake of the economic crisis typified by Libor scandal, not before time. This article looks at how corporate misdemeanours could be punished under the impending DPA regime.
Hieronymus Bosch, the Dutch renaissance artist, depicted the anguish and torment of sinners condemned to damnation in his work Hell 2. Their offences are not known to us but the punishment is eternal.
Thankfully, present-day sentencing is not so severe. The Sentencing Council issues a wide range of guidelines to assist, and recommendations are naturally ever changing to reflect the social attitude towards certain crimes. For example, the sentencing of sexual offences has become significantly more harsh in the last 20 or 30 years which has taken into account not only public perception but also the harm done to victims.
Many sentences involved incarceration. I have no expertise in this area. My background is as an accountant working in the field of forensic analysis and acting at court as an expert witness. Increasingly, though, penalties are financial - confiscation and fines are seen as the way forward where the risk to the public is low for offenders to remain at large.
The Sentencing Council will be tasked with the job of producing more guidelines for the levels of fines to be imposed for offences which may be the subject of DPAs. Of course, DPAs do not yet exist in the UK, so we need to look at other monetary penalties for direction.
Nobody needs to be reminded of how the value of money has changed. The cachet of being a millionaire has been devalued along with the currency, and it is a similar story with fines. In 2004 I was engaged to assist the prosecution with the examination of the financial statements of Thames Trains and its parent company in connection with the penalty to be imposed for the failures resulting in the Ladbroke Grove rail crash. Thirty-one people lost their lives. The financial statements of the group indicated that £40m was available; a record fine was imposed of £2m. As a layman, in terms of sentencing, I was surprised.
More recent corporate manslaughter fines under the Corporate Manslaughter and Corporate Homicide Act 2007 have not been vast. Cotswold Geotechnical was fined £385,000 but was given 10 years to pay in equal instalments so as not to push the business under, which would have led to the loss of jobs. This year Lion Steel was fined £480,000 to be paid within three years so as not to imperil the livelihoods of the employees. The fines show a light touch and sensitivity to the ability to pay. There’s a but - the benchmark fine under the guidelines is £500,000; if the offending company had assets of a billion pounds, then the maximum could be a drop in the ocean.
Fines imposed by the Financial Services Authority (FSA) have been on the rise. The FSA website lists individual fines imposed, the totals of which in recent years have been:
2010 89 2011 66 2012 to date 150
Fines imposed on corporate heavyweights are also growing. The most recent example in the UK is the fine on Barclays for its part in the Libor-fixing scandal. It was fined £290m compared with profits of £5.9bn - still just 5%. UBS, on the other hand, has been fined much more heavily for its part in the Libor scandal.
In the US, the penalties are more substantial:
|Fine ($bn)||Profits ($bn)||Percentage (%)|
|HSBC (for money laundering and sanctions busting)||1.9||11||17|
|Glaxo-Smith Kline (for mis-promoting drugs)||3.0||9||33|
|BP (for Deepwater Horizon disaster)||4.5||24||19|
Fines must be a deterrent. If they are too easy for the large corporates to pay, then they become just another corporate response. We broke the law - who cares? It’s just another business decision. The fine against McLaren when it unlawfully acquired technology from Ferrari was, on appeal, even allowed as a deduction from profits for corporation tax purposes as, in effect, wholly for the purpose of trade.
The confiscation regime under the Proceeds of Crime Act is draconian. In very broad terms it does not limit itself just to the confiscation of assets which are the profits from crime, but the value of the whole proceeds before any deduction of costs: this could put even the largest plc out of business.
I do not suggest that fines under DPAs need to follow the confiscation route. Penalties must be proportionate and enterprise must continue. Hopefully, criminal acts are generally a small part of a company’s business; the majority of trade will be legitimate. But large corporations must understand that crime does not pay. Fines based on fixed penalties or on the profits from the crime will mean that smaller companies may suffer heavily but large organisations could be treated leniently. A system where the fine relates to total profits or assets would give clarity and represent a deterrent.
Company directors may not suffer the anguish and torment of their ancestors, but the price their businesses pay must be real. Eternal damnation anyone? Or would you just like to part with half your assets?
Peter Luscombe is a director at accountancy firm, Carter Backer Winter LLP