UK Deferred Prosecution Agreements – the Fifth Instalment: Serco judgment represents a significant development in DPA regime
Published on 10th Jul 2019
On 4 July 2019, the Serious Fraud Office (SFO) confirmed that Mr Justice William Davis had approved the UK's fifth Deferred Prosecution Agreement (DPA). This judgment marks a significant evolution of the DPA regime in the UK and a number of interesting points emerge from the judgment, which are likely to inform the way in which it progresses in the coming years.
The Respondent to the DPA was Serco Geografix Limited (SGL), a now dormant company within the overall structure of Serco Group PLC.
SGL was ordered to pay a financial penalty of £19.2m and pay the SFO's costs of £3.7m.
SGL, and by a separate undertaking, Serco Group, were also required to improve ethics and compliance polices and procedure and provide on-going co-operation with the SFO and other agencies.
The DPA concerns the provision of electronic tagging devices used to enable the authorities to keep track of individuals who, for example, may have been granted bail subject to a curfew or are convicted prisoners released early on licence.
The relevant contracts with the Ministry of Justice were granted following a bidding process which required competing companies to show value for money.
The winning bid was submitted by Serco Limited (SL) and showed a profit margin of 14%.
Two contracts were awarded, containing provisions allowing the government to seek an abatement of 50% of sums claimed by SL in the event of "any unanticipated cost efficiencies". Pursuant to that provision, SL was required to submit a 'Financial Model' to the government every six months showing "actual revenues and costs incurred".
SGL's principal business was to service the two contracts concerned.
In order to avoid the abatement provision, as the judgment starkly records "SGL cooked their books to allow SL to retain the profit, 50% of which was believed otherwise would have been clawed back by the Ministry of Justice".
SGL did so by charging SL £500,000 per month for costs which were "complete fabrications". The scheme was deployed in four Financial Models submitted to the Ministry of Justice between 2011 and 2013, which included nearly £12m of what were found to be bogus charges.
An indictment was issued against SGL containing three counts of fraud by false representation and two of false accounting. This indictment will not be proceeded with, provided the DPA, which will last for three years, is fully complied with.
What can we learn from this DPA?
The Court was clearly concerned that the wrongdoing involved a substantial fraud on the public purse that reflected ingrained practice within SGL, but was nonetheless willing to approve the DPA, noting the following factors:
"[DPA] approval will only be given where there is the clearest possible demonstration of integrity on the part of the company concerned once the criminal activity has become apparent. This will require early self-reporting to the authorities, full co-operation with the investigation, a willingness to learn lessons and an acceptance of an appropriate penalty. The willingness to learn lessons must be shown via real, substantial and continuing remedial measures. All of that has been demonstrated by Serco Group PLC in this case".
The points highlighted are mainly reflective of issues identified in the four previous DPAs, (which we have analysed in earlier Insights). The Court, however, also carefully considered the question of proportionality, which clearly troubled the Judge.
SGL benefitted from substantial public contract work, which is governed by the Public Contract Regulations 2015 (the Regulations). These provide for possible indefinite debarment from tendering for future public contracts if a company is convicted of specified offences. A DPA is not a conviction, and the judgement makes clear that because the Regulations also give the government the right to debar companies shown to be guilty of grave professional conduct, the Court was willing to approve the DPA. Had it not been for this provision, the DPA would not have been approved, as to have allowed SGL to avoid the debarment provisions would not have been viewed as proportionate.
This is the first time that debarment has been considered in the context of a UK DPA, and for those advising companies engaging with the public sector, it is a timely reminder of the potential impact the Regulations can have when seeking to negotiate with enforcement authorities.
The DPA also contained another notable first in that it involved an undertaking being given by Serco Group, as a non-party parent to the DPA. This aspect was highlighted by the Judge who commented:
"This is the first occasion on which undertakings of the kind made by Serco Group PLC have been by a parent company in relation to a DPA entered into by one of its subsidiaries. It is an important development in the use of DPAs".
The undertaking set out significant obligations that include the improvement of compliance processes, annual reporting to the SFO and the need to self-report any other evidence found of serious or complex fraud.
Osborne Clarke comment
This case represents a significant milestone in the use of DPAs in the UK and the involvement of parent companies can be expected to be a recurring feature.
This might be particularly so if, as in this instance, the wrongdoing was not committed by the controlling mind of a relevant company. Interestingly in this case, the beneficiary of the fraud was SL, but SL could not be included within the DPA as its senior personnel were not complicit in the fraud. It may have been this factor that led the Court agreeing that it was appropriate for Serco Group to provide what is a clearly an onerous undertaking.