Parent company atones for the crimes of a subsidiary
17 July 2019
The fifth DPA, between the SFO and Serco Geografix Ltd, is the first in which a parent company has undertaken to pay a penalty and oversee a group wide reinforcement of its compliance programme even though it was not liable for the underlying fraud and false accounting by its subsidiary. Also worthy of note are the judge’s comments on public procurement, the extent of the cooperation on witness interviews, and the approach to naming individuals.
Electronic tagging contracts
"Serco" provides public sector services in the UK. In 2004, a Serco group company (Serco Ltd) signed contracts with the Home Office (and later the Ministry of Justice) to provide electronic tags for convicted and bailed potential offenders. Serco Ltd fulfilled the contracts through a wholly owned subsidiary, Serco Geografix Ltd (Serco Geografix).
During procurement, Serco Ltd had to demonstrate that the Home Office was getting value for money. It did so by submitting a forecast profit margin of 14%. Where unanticipated cost efficiencies were achieved, the contracts said that Serco Ltd would pass on 50% of the savings to the Government. To assess whether this clause was triggered, Serco Ltd provided details of its actual revenues and costs every six months.
Costs fabricated to charge against increased profits
Two years into the contracts, it became clear to Serco Ltd that its profit margin was 24%, well above the 14% it had predicted. To avoid having to share the additional profit with the Government, costs incurred by other parts of the group's business (mainly Serco Geografix), were ‘re-charged’ to Serco Ltd. However, by 2011 Serco Geografix had no further costs to recharge to Serco Limited, so Serco Geografix began fabricating costs. It also created false accounting records to hide the fraud.
SFO becomes involved
The Ministry of Justice referred Serco Ltd to the SFO in 2013, concerned that the company had been paid for providing tags to non-existent individuals. Serco Ltd’s parent company, Serco Group PLC (PLC), when looking into these allegations, found emails indicating accounting manipulation between Serco Geografix and Serco Ltd. PLC reported this to the SFO. The SFO investigation into accounting manipulation and fraud has culminated in the recent Deferred Prosecution Agreement between the SFO and Serco Geografix (now dormant), with a separate undertaking by PLC. The undertaking obliges PLC, inter alia, to be responsible for a large penalty and oversee a group wide reinforcement of its compliance programme.
Financial penalty – consistent approach to previous DPAs
The calculation of the penalty in the Serco DPA is consistent with what we have seen in previous DPAs. The total financial penalty was GBP19.2 million plus the SFO’s costs, as follows:
- The total profit made by Serco Ltd above the 14% margin figure was GBP35.6 million. The Ministry of Justice’s loss (and gain by Serco Ltd) was therefore GBP12.8 million.
- A culpability multiplier of 300% was applied to the loss due to the fraud.
- A discount of 50% was applied due to the cooperation shown by PLC during the SFO’s investigation.
- As PLC had previously settled a civil claim with the Ministry of Justice for GBP20 million (of which GBP13.1 million was considered to cover the period of the proposed indictment), no further element of compensation was included in the fine.
The multiplier of 300% is the same as applied in the Standard Bank DPA (which related to bribery by a Tanzanian sister company of a UK bank) and Tesco (which related to false accounting too). The highest multiplier we have seen so far was in relation to some of the elements of the Rolls Royce DPA fine (325%).
Serco got a higher discount for cooperation than Standard Bank (33%) and the same as Rolls Royce and Tesco (50%).
Corporate structures – parental responsibility
This is the first DPA which involves a group company (the parent) taking on substantial obligations, even though it is not liable for the underlying wrongdoing. Under a separate undertaking, responsibility falls on PLC for the payment of the financial penalty and to undertake the obligations required under the Serco DPA – ensuring that these are implemented by its subsidiaries.
In the 2015 Standard Bank DPA, Standard Bank plc signed the DPA because it was legally on the hook for failing to prevent bribery (under s7 Bribery Act 2010) by a Tanzanian sister company involved in a joint mandate, even though, as the judge accepted, it had no interest, oversight or control over its sister company.
Contrast the Serco case, where the parent company (PLC) agreed to undertake obligations under the DPA despite not being legally responsible for the underlying wrongdoing.
The judgment states that:
- Serco Ltd was the beneficiary of the fraud, but that ‘currently’ no ‘directing mind and will’ of Serco Ltd can be shown to have been involved in the fraud. So, Serco Ltd is not party to the DPA.
- The evidence demonstrates that ‘directing mind and will’ individuals within Serco Geografix were party to the fraud. This attaches potential criminal liability to Serco Geografix, which is party to the DPA, but is a dormant company with no assets.
Step in the parent company (PLC), which was not party to the fraud but ended up being responsible for the penalty anyway. The self reporting and cooperation was also from PLC. The court noted the significant remediation at PLC and at group level.
The judge remarked “The obligations accepted by Serco Group PLC are a key component of the DPA….. It is an important development in the use of DPAs.”
Ongoing public procurement relationship at stake?
Could PLC in theory have walked away? Very unlikely, for a variety of reasons, not least that there must have been a concern that should PLC not do the “right thing”, it and other Serco group companies would risk losing valuable ongoing and future MOJ contracts worth far more than the penalty incurred under the DPA.
A company may prefer a DPA in the hope that it means that it can continue to bid for public contracts. The Public Contracts Regulations 2015 provide for discretionary or mandatory debarment in certain situations. They also provide for “self-cleansing” by which a company can provide that it has taken appropriate remedial action sufficient to satisfy the contracting authority that it has demonstrated its reliability.
The judge stressed that, regardless of whether there is a criminal conviction or a DPA, it is for the Government (not the court) to decide whether the evidence of the remedial action is sufficient and whether it would be appropriate to exercise the discretion available via the self-cleansing provisions. The judge’s approval of the DPA is just approval of the ‘facts admitted’ – it is not a determining factor in the exercise of discretion by the government on debarment.
Agreeing not to interview witnesses in internal corporate investigation
PLC was considered to have undertaken substantial co-operation with the investigation by the SFO. It agreed not to interview witnesses during the internal investigation, and instructed an independent law firm to conduct a full document review and provided the SFO with a detailed report on its findings. It gave unrestricted access to the email accounts of its employees and former employees and was proactive in disclosing material, including some privileged accounting materials.
The subject of ‘first account’ interviews has been controversial in the past. Many companies will want to interview some witnesses on first hearing allegations of wrongdoing, in order to find out whether there is any substance to the allegations. The SFO has previously been very keen however that a company does not ‘churn up the crime scene’. However, the new Director of the SFO, Lisa Osofsky, recently expressed the view that companies should do some ‘legwork’ before reporting to the SFO.
In this case, PLC uncovered incriminating documentary evidence - emails that showed accounting manipulation. This was probably enough for it to decide whether there were sufficient grounds to self report. So, agreeing not to interview witnesses was not a difficult decision in this case, because of the incriminating emails. In other cases, where documentary evidence has not yet been uncovered, it is likely that a company will need to make some enquiries of employees. However, it may then subsequently agree with the SFO an approach regarding any further interviews.
Treatment of individuals
Specifically naming individuals or referring to their alleged conduct in publicly available DPA Statements of Fact can have a huge impact on individuals.
The 2017 Tesco DPA and Statement of Facts were not published until after the very public acquittal of three former Tesco executives. Despite their acquittals, the Statement of Facts (agreed before the trials of the individuals, but published afterwards) was drafted on the premise that the individuals were guilty of the same offences for which they were later acquitted.
On Tuesday it was reported that three senior individuals at Sarclad Ltd, an industrial equipment supplier, have been acquitted of bribery. Sarclad entered into the SFO’s second DPA (anonymised, due to reporting restrictions, as ‘XYZ Ltd’) in 2016. The Sarclad DPA and Statement of Facts have also just been published – naming the three individuals.
There are very serious concerns about the lack of recourse for individuals who are acquitted but who remain tarnished by statements made about them in a publicly available DPA.
The Serco Geografix individuals who remain under investigation have not been named in the Serco DPA, which has already been made public. The Statement of Facts has been ordered to remain confidential until charging decisions have been made. It remains to be seen whether it names individuals.
At present, an individual under SFO investigation does not have the right to make representations on what is written about him/her in a DPA Statement of Facts. Contrast the Enterprise Act 2002, which allows for representations to be made by an individual impacted by Statements of Objections within the cartel / competition regime, and similar provisions following FCA v Macris exist within the FCA regime. The ability to make representations is especially pertinent in cross-border cases where individuals in other jurisdictions may face prosecution or other adverse consequences in their home jurisdiction after being named in a UK DPA.
With thanks to Tessa Pullen (Trainee - Litigation & Investigations) for assisting with this blog post.
 GIR Live Women in Investigations conference – London, 12 June 2019