Is the SFO fit for purpose?

This article was originally published in Thomson Reuters Regulatory Intelligence on 2 June 2021 and is reproduced with permission from the publisher.

Following the conclusion of an eight year investigation, the Serious Fraud Office (SFO) suffered a blow last month as its case against two former Serco directors collapsed. This has drawn focus to the SFO's use of deferred prosecution agreements (DPAs), through which companies acknowledge criminal liability based on alleged wrongdoing committed by their employees, whilst those employees, who have subsequently been prosecuted for the same offence, have escaped liability at trial. This raises the question of whether companies under a DPA should have taken their chances with a formal prosecution hearing, and has commentators questioning the wider benefits of DPAs, as well as the SFO's recent performance.

Background

A DPA is an agreement between a UK prosecuting authority and a company, whereby a corporate prosecution is suspended for a defined period provided that certain conditions are met. The advantages of a DPA to a company include avoiding prosecution/ conviction, and the associated cost, time and reputation savings. In return, the company must agree a statement of facts proposed by the SFO, recognise their corporate criminal liability (not necessarily an express admission of guilt), and pay financial penalties.

A DPA must be concluded under the supervision of a crown court judge who is satisfied that that it is in the interests of justice, that the terms are fair, and that the agreement is reasonable and proportionate. Furthermore, the judge must be satisfied that there is sufficient evidence that there would be a realistic prospect of conviction (had this instead progressed to prosecution). In the light of this, a DPA would seem like a sensible compromise to have made when facing the prospect of a corporate prosecution.

Serco

Serco Group PLC is a FTSE 250 outsourcing company. In 2013, the SFO began investigating two Serco subsidiaries, SL and SGL, in relation to alleged fraud and false accounting by those entities' employees in connection with contracts entered between SL and the UK Ministry of Justice (MoJ). These contracts included a mechanism which fed SL's profits over an agreed margin back to the MoJ. The SFO alleged that SL had manipulated this mechanism by faking invoices to artificially reduce SL's profitability and reduce the amount payable to the MoJ. The SFO claimed it had evidence that SGL's “directing minds” were involved in devising and operating this mechanism. SGL subsequently agreed to enter into a DPA with the SFO, which included its recognition of corporate liability created by criminal actions undertaken by two of its former directors, and paid a financial penalty of GBP19.2 million.

A fraud trial against the two SGL directors commenced in March 2021; however, on April, 26 2021, the case against them collapsed dramatically when the SFO admitted that it had incorrectly disclosed certain materials. The SFO applied to adjourn the case for lack of evidence, but the judge instead decided to direct the jury to return 'not guilty' verdicts for the defendants. The judge also commented that “the trial cannot safely and fairly proceed” and noted that there were “...real concerns in relation to the nature of the prosecution case.”

Problems with DPAs

This decision undermines the earlier DPA that SGL had entered into, believing that it would otherwise be held liable for the criminality of its directors, which seemingly creates contradictory outcomes based on the same evidence.

The outcome in this case, in addition to those in several other cases¹ calls into question the utility of DPAs. The disparity of treatment between individuals and corporations is highlighted by the fact that only corporations can enter into DPAs. Consequentially, through a DPA, a company is able to avoid prosecution at the same time it agrees that its senior employees had engaged in criminal activity, leaving those employees to face criminal prosecution and the major financial and emotional repercussions that result. In addition, once published, DPAs that name the employees involved in the alleged criminality will tarnish the reputation of those individuals even when they are subsequently exonerated of that same alleged criminality.

Companies that find themselves considering whether to enter into a DPA should ensure they independently examine the SFO's evidence, and take legal advice on the likelihood of a successful defence at trial. A DPA may not automatically be the most attractive option; in certain circumstances, a trial could be more attractive and cheaper than the penalties payable, or the terms and conditions to be agreed, under a DPA.

Reflection

The SFO is facing problems prosecuting individuals on the back of DPAs, but the extent to which this reflects on its competency can be mitigated by its various successes.

• The background to all of this is the SFO's work on reforming UK bribery laws through the Bribery Act 2010, which simplified bribery offences and introduced a new corporate offence of failing to prevent bribery. A 2018 review of the legislation by the House of Lords' Select Committee concluded that, almost 10 years on, it is “...particularly effective, enabling those in a position to influence a company's manner of conducting business to ensure that it is ethical.”
• Through settlement processes, such as the DPA process, corporates have been encouraged to self-report potential criminal wrongdoing and co-operate with the SFO. Concluding a DPA also enables the SFO to achieve largely satisfactory resolutions with those companies under investigation, typically avoiding lengthy trials at the public expense, recouping ill-gotten gains, imposing substantial financial penalties, and introducing positive changes to corporate ethics and compliance.
• The SFO has had significant success enforcing corporate criminality, including recently securing c. GBP500 million and EUR3 billion fines against engineering and aircraft companies, respectively. The latter case was a significant result involving international coordination between the UK, France and the United States.
• This increase of cooperation between enforcement agencies should also be considered a success in its own right. The SFO has stressed the “shrinking world” of cross-border fraud and corruption; recognising this reality is key to disrupting international financial crime in order to prevent and prosecute cases with the highest harm and complexity.

The operation of DPAs may need revising to ensure fairness of treatment between individuals and corporations, but their very existence should be welcomed as a useful weapon in the SFO's armoury to tackle complex cases of corporate crime. The SFO will inevitably face criticism after any loss, but one should not forget the positive steps it has taken to achieve its goals of bringing corporate wrongdoers to account.

Given the increased collaboration between UK and international prosecutors and regulators, companies in the regulated sector should monitor and review their economic crime and AML systems and controls to ensure that they remain on the right side of their regulator. This is particularly important given the trajectory of future regulatory policy. Not only is the Financial Conduct Authority increasing its criminal enforcement focus, so is HM Revenue & Customs, as is the UK Crown Prosecution Service. The new CPS Economic Crime Strategy seeks to tackle the most common types of fraud in the UK, and focusses on the increasing risks posed by tax and COVID-19 related frauds aided by an increasing reliance on technology. This increased inter-agency and inter-governmental cooperation, combined with more active and joined up enforcement, can only benefit the effectiveness of the financial regulatory system.

¹ SFO v Sarclad Limited (July 16, 2019); SFO v Tesco Stores Limited (April 10, 2017); and SFO v Güralp Systems Limited (October 22, 2019).