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On 7 January, 2014 JP Morgan Chase was ordered to pay $1.7bn to settle criminal charges brought by the US Attorney’s Office for the Southern District of New York alleging that that it had failed to file suspicious activity reports in relation to known or suspected violations of federal law or suspicious transactions. In a related action the beleaguered Bank also settled separate proceedings brought by the US Office of the Comptroller of the Currency for $350m.
The settlements arise out of the Bank’s failure to alert the US authorities to Mr Madoff’s criminal activities despite being warned by senior executives as early as 1998 that his returns to investors were “possibly too good to be true”.
The episode is yet another “bad day” for the Bank and the reputation of the banking sector generally. Since 2010 JP Morgan has paid penalties totalling $28.7bn for various failings relating to such matters as the misrepresentation to investors of bundled bad home loans as high quality securities and the mis-selling of mortgage bonds to pension funds and other investors.
There should be little doubt that the size of these penalties will act as a deterrent and a positive encouragement to the banking sector more generally to clean up its act. At the very least shareholders should insist upon it.
Less publicised is that when settling criminal charges in this way US Prosecutors can also insist on a package of reforms and measures to enhance systems and produce a cultural change within the offending organisation.
To date this tool has not been available to the UK Courts. Prosecutions of large corporations for criminal acts have been limited and, when commenced, have often floundered sometimes in a wave of adverse publicity. That may be about to change.
Schedule 17 of the Crime and Courts Act 2013 is soon to take effect and affords UK Prosecutors the power to enter into deferred prosecution agreements. With the Court’s approval, UK prosecutors will be empowered to enter into agreements whereby criminal proceedings are suspended pending the offending corporate meeting certain conditions. These conditions can include, amongst other matters, the payment of a fine, the disgorgement of any profit, donations to charity and the enhancement of internal systems and processes.
The cynical may say that this new power enables large organisations to buy their way out of prosecution. However, ultimately, it is individuals who commit criminal acts for which corporates can be held accountable. Very often by the time law enforcement becomes involved the individuals concerned have moved on and for the new management in place the issues are historic.
For the corporate, this new tool removes much of the stigma associated with a criminal conviction and by doing so it also removes much of the incentive to contest the allegation. For the prosecutor, it obtains proper redress and, against a background where the corporate has accepted the terms, may make the criminal prosecution of any individual associated with the misconduct far simpler.
The use of deferred prosecution agreements has the potential to be tool the SFO needs to tackle effectively criminal activity by senior corporate executives. With the SFO’s current level of resource and tarnished reputation, the key question is whether it is up to the challenge.
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