Deferred Prosecution Agreements: the claims horizon

Deferred Prosecution Agreements (DPAs) became a new feature of the regulatory landscape in 2014.

In the current climate of enhanced regulation, potential exposures for insureds in the financial lines sphere – particularly multinational companies - may include criminal, regulatory and civil liability with significant exposures in fines, damages and costs, for both companies and their directors and officers.

Since our update in September 2016, we have seen two further DPAs negotiated between the Serious Fraud Office (SFO) and UK corporates. Significantly, the most recent DPA is the first not to arise from Bribery Act violations.

Rolls Royce

In January 2017, Rolls Royce admitted numerous counts of bribery and corruption which “implicated senior management, and on the face of it [the] controlling minds” of the company, thereby falling foul of the provisions of the Bribery Act 2010.

Lord Justice Leveson described the conduct as involving “the most serious breaches of criminal law in the areas of bribery and corruption”. The financial cost to Rolls Royce is expected to be approximately £800 million including penalties, fines and costs.

SFO investigations into Rolls Royce’s senior management are continuing, with “dozens” of employees being interviewed under caution, including its CEO Sir John Rose.

Tesco

In April 2017, the SFO announced that a DPA had been agreed with Tesco. This followed a two and a half year investigation by the SFO, Financial Conduct Authority (FCA) and the Financial Reporting Council into Tesco’s accounting practices between February 2014 and September 2014.

This DPA appears to differ from its predecessors, as it is not predicated on the “failure to prevent” type of corporate liability created under s7 of the Bribery Act 2010.

The DPA was agreed in relation to the potential liability of Tesco Stores Limited and does not address whether any liability attaches to Tesco Plc, or the employees of either company.

Meanwhile three former Tesco employees are due to stand trial in September 2017 accused of fraud by abuse of position and false accounting.

The precise terms of the DPA remain subject to reporting restrictions, pending the outcome of the criminal trial. However, Tesco have announced a £235 million “exceptional charge” on its 2016/17 balance sheet as a result of penalties, compensation, costs and related costs.

That figure includes an £85 million compensation scheme for shareholders and bondholders who purchased shares between 29 August 2014 and 22 September 2014, which were later discovered to be overvalued.

The compensation scheme is the first to be agreed with the FCA under s384 of the Financial Services and Markets Act, which empowers the regulator to require a listed company to pay compensation for market abuse.

Commentary

Policy issues

  • The DPA regime requires entities to self-report, which is likely to trigger notifications under civil liability policies and advancement of defence/investigation costs.
  • For corporates and D&O/civil liability insurers, the level of costs incurred by insureds in defending SFO investigations will be significant. Rolls Royce’s own costs associated with the proceedings are said to be £123 million. Insurers may therefore wish to consider sub-limiting their exposures to costs of these type. 
  • Corporate business policy exclusions should also be kept under review to ensure there is clarity as to whose knowledge can trigger reliance on such an exclusion.
  • Conflicts may emerge between companies and their directors and officers, often requiring separate legal representation. In some circumstances, an employer may admit liability effectively on the part of senior employees. However, in the absence of relevant admissions from the relevant director or officer, insurers may find themselves indemnifying significant sums in defence costs unless/until criminal liability is established. Even in circumstances where DPAs appear to acknowledge senior employees’ conduct, this may fall short of satisfying the “proven” requirements under conduct exclusions in most D&O policies.

Third party liability

  • Corporates may find their DPAs being relied upon by third party claimants seeking to pursue them for liability in conspiracy, contract or breach of competition law. 
  • There have been no claims made by competitors as a result of a company’s breach of competition laws in the UK as yet, but this has happened in South Africa and in the US. Therefore, this is an area where further claims could be on the horizon.

Civil claims against directors?

  • Companies can pursue their former directors and officers in negligence and/or for breach of duty in relation to conduct exposing the companies to loss, in order to recover from D&O insurers or from the individual’s personal assets.
  • Additionally, there is a risk of follow on civil liability claims against directors and officers arising from shareholder derivative actions which could seek to recover fines and costs paid by the company in relation to breaches of the Bribery Act, holding directors/ officers accountable for their failure to protect the company from liability.

Given the advantages of DPAs to a business responsible for wrongdoing, including avoiding conviction and continuing as a going concern, DPAs are predicted to increase in number. D&Os are increasingly likely to be exposed to personal sanction and both they and their employers will be looking to their Insurers for support, a challenge which insurers need to be prepared to meet.

We anticipate the extent and effect of DPAs may consequently prove more far reaching for financial lines insureds and their insurers in the upcoming months/ years.

Related item: Bribery Act in action: deferred prosecution agreements

Read other items in the London Market Brief - June 2017