Lexis®PSL Corporate Crime
The importance of co-operation and proportionality in securing a DPA (Serious Fraud Office v Serco Geografix Ltd)
Corporate Crime analysis: On 4 July 2019, court approval was given to a deferred prosecution agreement (DPA) between the Serious Fraud Office (SFO) and Serco Geografix Ltd (SGL) on the basis of the ‘very substantial co- operation’ and the ‘significant remedial measures’ demonstrated by the companies. Fulcrum, analyses the judge’s decision and explains that the case highlights the significant level of co-operation that will be required in order to secure a court approved DPA.
Serious Fraud Office v Serco Geografix Ltd [2019] Lexis Citation 67
What are the key differences between this court approved DPA and the four which have preceded it?
One of the novel aspects of this DPA is the fact that—as part of the formal requirements SGL set out in the DPA—is that the Serco Group Plc (the ultimate parent undertaking (Serco Group)) would provide an extensive formal undertaking which included:
- the assumption of responsibility of SGL’s obligations to pay the financial penalty and costs in the event that SGL should fail or be unable to do so
- the application of any necessary modifications to its compliance programme and group-wide ethics and compliance functions
- ongoing co-operation with the SFO and other law enforcement and regulatory authorities (albeit expressly not requiring the production of legally privileged communications to the SFO)
- reporting fraud by itself or related companies and individuals
- annual reporting on its group-wide assurance programme
- not making substantive changes to SGL’s business operations—whether through sale, merger, or otherwise—as they existed at the date of the DPA, without the written consent of the SFO
- a strict prohibition upon any representative of the Serco Group making any public statement contradicting the matters described in the statement of facts
These undertakings are memorialised in a letter from Serco Group to the director of the SFO, dated 2 July 2019, and countersigned by her on the same date.
These undertakings go far beyond the only previous example of a parent company accepting responsibility on behalf of its subsidiary. In Serious Fraud Office v Sarclad Ltd [2016] Lexis Citation 686, the parent undertaking— Heico Companies LLC—agreed to return £1.9m in dividends that it had received from Sarclad over the indictment period to contribute to the £6.2m disgorgement paid by Sarclad.
The undertakings from Serco Group were required by the SFO due to the fact that SGL had been a dormant company since 2018, having previously existed—until the suspension of the relevant contracts in 2013 (see below)—to service two contracts held by Serco Limited (SGL’s parent (SL)) for the supply of monitoring equipment to the UK government. As noted below, the complicity of the management of SL in the relevant offending would also have been a relevant consideration.
What was the background to this DPA and why was the DPA approved in this case?
The SFO’s investigation into the conduct of business of G4S Plc and SGL, and the electronic monitoring contracts that both companies signed with the Ministry of Justice (“MoJ”), commenced on 4 November 2013. The original subject of the investigation were the contracts into between these companies and the MoJ for the electronic tagging and monitoring of offenders who had been released from prison in 2005. The contract was due to expire in April 2013, and the MoJ decided to retender its electronic monitoring contracts. In doing so, it asked bidders, including G4S and SGL, to provide supporting information.
Upon the provision of this information, the MoJ identified various inconsistencies regarding the average length of orders under which subjects were being monitored. PwC were instructed by Chris Grayling (then Secretary of State for Justice) to conduct an external forensic audit in order to examine and investigate the contracts.
On 11 July 2013, Grayling announced the initial findings of the audit. The audit found that the company and Serco had overcharged the MoJ for the electronic tagging of offenders for a total of tens of millions of pounds. It revealed that both companies had engaged in questionable practice in relation to their charges to the MoJ. For example, in one case, SGL had been monitoring one offender with four separate orders, for four separate alleged offences, and monitoring charges for this offender were requested for each order, rather than for the one offender. On the same day that the findings of the audit were released, SGL withdrew its bid in the retender, closely followed by G4S in August 2013.
Further to the initial findings of the audit, on 11 July 2013, Francis Maude, Minister for the Cabinet Office, announced a government-wide investigation into 28 major contracts that the company and SGL held across government (the cross-government review). While the cross-government review excluded the review of the electronic monitoring contracts, its scope included the billing and payment arrangements for the contracted services and how well the contracts had been managed.
In Autumn 2013, the findings of the cross-government review were published and, among other things, found that there was no evidence of deliberate acts or omissions by G4S or SGL which had led to errors or irregularities in their invoicing.
In light of the findings of the audit, Grayling requested the SFO to investigate the company’s accounts. On 4 November 2013, the SFO announced that it was conducting a criminal investigation into G4S and SGL’s electronic monitoring contracts. The SFO’s allegations consisted of fraud in the conduct of business by G4S and SGL, and it was said to cover the period between start of contract up to the present day. During the course of the investigation, a general restriction was imposed on G4S and SGL which prevented them from signing new contracts for any government work. SGL reached a £70.5m settlement with the MoJ in 2014 (the settlement) and, after undertaking a similar overhaul, the ban on SGL was lifted in January 2014. G4S reached a similar settlement and they agreed to pay the MoJ a total of £108.9m (excluding VAT), comprising a cash payment of
£75.9m and credits of £33m for services previously provided.
In addition to the SFO investigation, the Financial Reporting Council (“FRC”) launched its own investigation into the way Deloitte LLP had prepared, approved, and audited the accounts of SGL.
The SFO investigation found insufficient evidence for a realistic prospect of conviction of SGL in relation to the allegations that SGL and G4S were billing the MoJ for electronic tagging which was not being provided, which had formed the subject of these settlements with the MoJ. However, in reviewing its documents during the course of the SFO’s investigation, SGL uncovered evidence of accounting irregularities, which it reported voluntarily to the SFO in November 2013—using the same vernacular as the learned judge, it had ‘cooked its books’ in order to make it appear that its contracts with the MoJ were less profitable than they in fact were.
The incentive for this fraud and false accounting was simple—under the contract, the MoJ was entitled to an abatement of charges on unanticipated cost efficiencies achieved by SL. In executing the contract, SL had far exceeded the 14% profit margin anticipated at the point that the contract was agreed. Rather than honour the abatement of charges, SGL had originally been re-charged for genuine costs incurred in other parts of the Serco Group. However, when that no longer provided sufficient suppression of the profit levels, SL began to account for
£500,000 per month in completely fabricated charges for services from SL, described as charges for equipment, staff, and overheads. The whole scheme was devised by individuals within the management of SL. No ‘directing minds’ of SL could be fixed with liability for the purposes of attributing criminal liability and, hence, SL was not formally a party to the DPA, however, it is manifest that the responsibility for the scheme must have been the driver for the undertakings provided by SL, referred to above. SL reported these matters to the SFO and this led ultimately to the agreed terms of the DPA.
The DPA was approved by the court in principle on 27 June 2019 and approved in final form on 4 July 2019.
The Serco DPA concludes the SFO’s investigation of SGL and all Serco Group companies for this conduct, but the investigation into individuals associated with this conduct remains active. It is noteworthy that the court required the SFO to indicate when a charging decision would be made in relation to the individuals, for the purposes of postponing publication of the statement of facts, and the date of 18 December 2019 was fixed for this purpose.
What novel or interesting factors arose and how did the judge deal with them?
The case involved some novel and interesting points that Davis J had to take into consideration when deciding whether to approve the DPA.
The SFO acknowledged that the fraud carried out by SGL took place over many months and was substantial. It also acknowledged that the conduct had a serious impact on the integrity of the process whereby public functions are contracted out by the UK government to companies in the private sector. The SFO argued, however, that these considerations were outweighed by a number of factors, including:
- the prompt and detailed reporting of the issues by SGL
- substantial co-operation
- a lack of history of similar conduct
- the age of the conduct and subsequent remedial measures that had been taken
- the disproportionate consequences which might result from a criminal conviction
Davis J was particularly troubled by this last issue concerning proportionality. The DPA was the first to relate to public procurement contracts with the UK government, and SGL faced indefinite debarment from tendering for future public contracts if convicted whereas debarment might not result from a DPA. The SFO had argued that conviction and resulting debarment would be disproportionate given the remedial measures implemented by the company and the undertakings agreed to by its parent company (see below). Any such debarment would have deprived SL of 90% of its revenue and this would not be proportionate given the positive actions taken by SGL and SL.
Davis J struggled with this and said that, if the effect of his approval of the DPA had been that SGL could have continued to supply services to government departments in circumstances in which it would not have been able to, had it been convicted:
‘…I doubt that I would give approval. Public concern over the way in which public services are provided by private companies is real. For me to take a course which would amount to a favourable determination of the position of a private company vis-à-vis public procurement would involve me in a quasi-political decision. That is not the function of a judge in any context and certainly not in the context of the approval a course which leads to a company not being prosecuted for serious fraud.’
In SL’s case, the government had considered the position under the Public Contracts Regulation 2015, SI 2015/102 and, in particular, whether the ‘self-cleaning’ provisions (which essentially allow the exercise of discretion where mandatory debarment would otherwise flow, in cases in which companies have taken sufficient remedial action). The government confirmed to the court that the measures taken by Serco Group were sufficient to mean that there was ‘…no current reason why Serco Group should not continue to be a supplier’ to the government. As a consequence, Davis J was satisfied that the DPA was not a determining factor in terms of Serco continuing to provide services to the government.
It is also interesting that, in relation to co-operation, the court credited SGL for their ‘very substantial co- operation’ and the ‘significant remedial measures’ that had been put in place and that, as part of this co- operation, the SFO had requested that Serco Group should not conduct any witness interviews during the criminal investigation—a request that was fully complied with. Moreover, SGL agreed to waiver of privilege in relation to some accounting material. The SFO’s request in relation to interviews is important, because it could arguably have restricted Serco Group’s ability to fully investigate and remediate the conduct in question.
It would be unfortunate if this, and (as previously observed) the waiver of privilege, were to become a standard requirement—due to the inhibition this places upon companies in making informed decisions on their interaction with the authorities and in making swift decisions in relation to internal remedial actions—companies will need to give careful consideration as to whether they are prepared to accede to such requirements, particularly given the lengthy duration of SFO investigations even where an agreed resolution such as a DPA is ultimately the outcome.
What are the terms of the DPA and why are these particularly interesting?
SGL will pay a financial penalty of £19.2m, and the full amount of the SFO’s investigative costs (£3.7m). The starting point for Davis J was the amount of money that would have been due to the MoJ by way of abatement but for the fraud and false accounting, namely 50% of the total profit over the 14% anticipated profit, which amounted to £12.8m.
Having found the culpability of the company to be high—taking into consideration factors such as the sustained level of offending by a company in a position of trust in relation to the public—Davis J determined that there was no reason to depart from the starting point of a 300% multiplier (which would have led to a fine of £38.4m), Davis J applied a discount of 50% on account of the level of co-operation , and in light of the fact that this had been the practice adopted in all but one of the earlier DPAs, resulting in the £19.2m figure.
In light of the £20m paid to the company pursuant to SL’s 2013 settlement agreement with the MoJ—of which £13.1m was properly apportioned to the indictment period—Davis J confirmed that it would not be proportionate to order compensation or disgorgement, which is why these elements did not feature as requirements under the DPA.
Further prosecution of SGL on the indictment will be deferred for a period of three years, during which time SGL will:
- fully cooperate with any and all SFO pre-investigations, investigations, and prosecutions
- at the request of the SFO, fully cooperate with any other domestic or foreign law enforcement and regulatory authorities and agencies in any investigation or prosecution of any and all matters relating to the conduct described above
- promptly report any evidence or allegation of serious or complex fraud by itself, its parent entities or affiliates, or its officers, directors, employees, or agents that would satisfy the SFO’s criteria for case acceptance
- enhance and report annually on the effectiveness of its ethics and compliance programme
Perhaps the most interesting aspect of the DPA, however, is the fact of the undertakings made by Serco Group. These undertakings mirrored the obligations that were imposed on SGL under the DPA and were significant for several reasons.
First, they represent the first time that undertakings have been given by a parent company in relation to a DPA entered into by one of its subsidiaries.
Second, the court noted that, without these undertakings ‘…it is very unlikely that the goals of a DPA could have been achieved’. SGL was a dormant company and the obligations imposed on it were consequently of limited value.
Finally, the court noted that this is ‘…an important development in the use of DPAs’ and it therefore seems likely that this will be a feature of future DPAs in such circumstances, especially where difficulties may arise in establishing a ‘controlling mind’ within the parent company for fraud committed by a subsidiary.
What does this DPA teach us about the types of cases in which a DPA will be considered a suitable alternative to prosecution?
This was a case in which it was plain that both sides—the SFO and SL—had much to gain from the pursuit of a DPA as opposed to a prosecution. From the SFO’s perspective, in light of the dormant status there would have been real questions as to the public interest in prosecuting a dormant company (similar to the questions raised in R v Skansen Interiors Limited, where a dormant company was sentenced to an absolute discharge, having been prosecution for an offence contract to section 7 of the Bribery Act 2010). From the Serco Group perspective, the cost and reputational damage associated with a trial, in addition to the risk of debarment from public contracts, meant that a failure to cooperate and a conviction would have been extremely undesirable.
Following this case, it seems likely that parental undertakings of the sort provided by Serco Group are more likely to be required by the SFO and the courts as part of future DPAs in such cases. This is particularly the case where, as here, without any such undertakings from the parent, the undertakings given by the company would have little practical impact, and where the parent company has itself benefitted from the unlawful conduct of its subsidiary and its management had been complicit in the criminality, but where difficulties in proving there was a ‘directing mind’ within the parent would have acted as a bar to the prosecution of the parent. It should be noted that this is precisely the sort of case in which a ‘failure to prevent’ offence for fraud and/or false accounting, of the sort currently under consideration by the government in its consultation, could have been deployed against SL.
The Serco case serves as a reminder of the significant level of co-operation that will be required in order to secure a court approved DPA which may include, as in this case, proactively disclosing material to the SFO, even after the SFO’s initial investigation had found no evidence of dishonest or fraudulent activity, an agreement not to interview witnesses while the SFO conducts its investigation, and the waiver of privilege over certain documents.
Finally, because of the significance of debarment from public contracts for many corporates, Serco will provide a precedent as to the sorts of measures that will reach the ‘self-cleaning’ bar for the government. Due to the necessary exercise of discretion involved in the government’s consideration as to whether a company’s remedial actions have been sufficient, DPAs will no doubt continue to be particularly attractive to those companies for whom public procurement is a factor. Should Davis J’s concern as to making what he considered amounted to a ‘quasi-political’ decision around procurement prove the universal position of the courts, as seems likely, it means that the government itself will be called upon to ‘enter the arena’ in all relevant DPAs in the future. The reality is that, given the court’s position, DPAs are likely to be considered the default option for ‘key strategic suppliers’ to the government, such as Serco Group.
Interviewed by Max Aitchison.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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