On 4 July 2019, Southwark Crown Court approved a deferred prosecution agreement between the SFO and Serco Group PLC in relation to fraudulent reporting in contracts for “tagging” individuals under curfew conditions. This is only the fifth DPA that the SFO has concluded since DPAs became available in the UK. It raises some interesting questions about the public interest in the government procurement process, and identifying a directing mind for the offences.
In 2004, Serco Limited (SL) contracted with what is now the Ministry of Justice (MoJ) for the provision of electronic monitoring or “tagging” services, to be supplied by Serco Geografix Limited (SGL). SL’s profit margin would increase as more devices were supplied, as the core costs of the associated computer system remained more or less constant.
SL forecast a profit margin of 14% in the bidding process and later representations to the MoJ. The contracts were not subject to a profit cap, but provided for a 50% abatement of charges for “any unanticipated cost efficiencies”. Internal presentations at SL that were not disclosed to the MoJ, identified the true profit margin to be 24% by 2008. The total profit achieved above the agreed 14% margin was some £25.6m, meaning the 50% abatement due would have been £12.8m.
SL admitted that it fraudulently reduced the profit margin it reported to the MoJ, whilst keeping overall profits within the company structure. It did this by retrospectively re-charging to SL at least £6.2m of costs incurred principally by SGL. When SGL’s expenses had been exhausted in this way, SGL then charged SL £500,000 per month for costs described as equipment, staff and overheads – which were complete fabrications.
In 2013, SL and Serco Group PLC agreed a £70m settlement with the MoJ in relation to these and other claims, including £20m representing 50% of “profit over bid”, and a further £1.35m in 2015.
What is in the DPA?
The deferred prosecution agreement between the SFO and Serco Group PLC extends to all of Serco’s subsidiaries. This represents a significant extension of scope, as a corporate prosecution would be brought solely against SGL, which is now a dormant company, and not against other companies in the Serco group.
Because of the settlement amounts already paid to the MoJ, no further compensation element was found payable. However, a financial penalty of £19.2m was imposed. This was calculated with a 300% multiplier of the £12.8m abatement figure, making a penalty of £38.4m.
A discount of 50% was applied (rather than one third as would be required by the Sentencing Council guideline for a guilty plea at the earliest opportunity), bringing the penalty to £19.2m, because the DPA process saves so much time and money. The DPA agreement also includes payment of the SFO’s costs of c. £3.7m.
In the DPA, Serco Group PLC agrees to modify its compliance programme to ensure an effective system of internal accounting controls, and a rigorous compliance programme including anti-fraud and anti-bribery policies and procedures. It will report annually in writing to the SFO for three years on the progress of the compliance programme, and report to the SFO if it learns of any serious and complex fraud committed by anyone connected with Serco Group PLC or its affiliates.
How is this in the public interest?
Mr Justice Davis concluded his judgment by observing, “There may be cynicism in some quarters about the process by which a corporate entity can take advantage of a DPA. This cynicism is not well placed.” He explains that that is so because of early self-reporting, full co-operation, a willingness to learn lessons and an acceptance of an appropriate penalty.
However, it remains the case that the last three DPAs have involved three prominent UK companies who had the means to buy themselves out of a prosecution. Would other smaller companies with more limited means and resources to provide such enhanced co-operation receive similar favourable treatment?
This was a substantial fraud carried on over many months, apparently reflecting business practices ingrained in the company. The fraudulent conduct had a serious impact on the integrity of public procurement processes. Public procurement under the Public Contracts Regulations 2015 provide for mandatory or discretionary debarment from public procurement in different situations.
Despite the seriousness of the issues, the SFO argued that it would be disproportionate and not in the public interest for SGL and/or SL to be debarred from participating in any government procurement exercise, as a result of it admitting defrauding the public purse. Sufficient remedial measures had already been taken, and Serco Group PLC had provided further undertakings to the SFO going forward.
A quasi-political decision?
Davis J doubted whether he would have given approval to the DPA, if the consequence of his approval were to be that SGL could continue to supply service to government departments; whereas the company would not be able to do so in the event of a conviction rather than a DPA. He said such a consequence would have amounted to an inappropriate, quasi-political decision.
But the judge was satisfied that his approval of the DPA was not the determining factor in public procurement decisions. It was for HM Government to exercise its discretion to determine whether the remedial action undertaken was sufficient to demonstrate the company’s reliability, as provided under the “self-cleaning” provisions of the Public Contracts Regulations.
In fact, the Cabinet Office’s view had been confirmed in a letter seen by the judge from the Government’s Chief Commercial Officer, that Serco could continue to be a key strategic supplier to HMG. The administrative decision as to the continued involvement of Serco in public procurement had properly been taken within the Cabinet Office. Approval of the DPA was thus not the determining factor. In any event, SGL is currently a dormant company that is unlikely to engage in a procurement process.
Where was the controlling mind?
Under English law, person(s) with a “controlling mind” over a company must be found in order to secure a criminal conviction against that company. This requirement can make it harder to prosecute companies successfully in the UK. In the USA, vicarious liability “respondeat superior” rendering the corporate responsible for the actions of individual employees, has been available to prosecutors for some time, making it far easier to secure corporate convictions.
Even though the fraudulent re-charging scheme was devised by management within SL, currently no “directing mind” of SL could be shown to have been involved in the devising and the putting into effect of the fraud. However, identifiable individuals within SGL could be described as “directing minds” of the company, who were party to the fraudulent scheme.
These individuals in SGL, it is said in the DPA judgment,, were aware of the terms of contracts with the MoJ and the desire to avoid a 50% abatement of profit margins in excess of those tendered. The inclusion of the bogus charges halved the monthly reported profit margin range from the true figures, ensuring that the MoJ was unaware of the profitability of the contracts. As a result, SL was able to retain the excessively high profit margins. The individuals remain under investigation by the SFO and a charging decision is expected by the end of the year.
Should new offences be introduced for companies failing to prevent economic crime, as was proposed in a MoJ consultation in 2017, it will become easier to convict companies where a “controlling mind” cannot be identified.
In the DPA, Serco Group PLC agrees to co-operate fully with the SFO in any and all SFO pre-investigations, investigations and prosecutions in any process against its personnel in relation to these facts. It agrees in any further proceedings not to contradict any statement contained in the statement of facts agreed as part of the DPA.
The two DPAs concluded by the SFO prior to that with Serco, resulted in no convictions against individuals who had been said to be integral to the criminality. While the Serco DPA represents a significant result for the SFO and its Director, Lisa Osofsky, the scale of that result will only become clear once any criminal action against those described in the judgment as those “who can properly be described as directing minds of the company” is concluded.