In a further blow to the SFO, its prosecution of two former Serco executives collapsed last month after errors in disclosure led the judge to direct the jury to return verdicts of not guilty.
After Sarclad,1 Tesco2 and Güralp,3 this marks the SFO's fourth failure, in four attempts, to successfully prosecute individuals (senior employees) for their involvement in Deferred Prosecution Agreements (DPAs) that their employers had agreed with the SFO, accepting corporate criminal liability on the basis that those employees were personally guilty of the offences. The cases have therefore produced seemingly contradictory outcomes with regard to corporates (accepting criminal liability) and individuals (all subsequently acquitted) based on the same evidence.
As a result of the decisions reached in these cases, has the SFO incentivised companies to take their chances with an investigation or even fight a prosecution, instead of acquiescing to the DPA process?
This article examines the facts of Serco, Sarclad and Tesco and considers some of the underlying concerns with the DPA process.
Corporate Criminal Liability
As a brief reminder, a company can be found liable for a criminal offence under the “identification principle.” This applies where particular criminal wrongdoing, proven to have been committed by the “directing mind and will” of a company (which is an individual or group of individuals of sufficient seniority at the organisation), can be attributed to the company.
The case against Serco
Serco Group PLC is a FTSE 250 outsourcing company providing public services to the UK health, transport and defence sectors. In 2004, a principal subsidiary, Serco Limited (SL) was awarded two contracts (by the Secretary of State for the UK Home Department, which later became the MoJ) for the supply of electronic tags (used to monitor suspected criminals remanded on bail) to the UK government (Contracts). The business of Serco Geografix Limited (a subsidiary of SL) (SGL) was to service these Contracts.
In short, the Contracts included a mechanism whereby profits made by SL over an agreed margin would be paid to the MoJ.
In 2013, the SFO opened an investigation into SL and SGL in relation to the Contracts. The SFO alleged that invoices had been fabricated to reduce SL's profitability by GBP500 thousand a month, thereby reducing the amount to be paid as rebates to the MoJ by the same amount. Whilst the SFO was unable to find any “directing minds” of SL to have been involved in devising this scheme or putting it into effect, it purported to uncover evidence demonstrating that individuals within SGL (including two former SGL directors), who could properly be described as “directing minds” of SGL, were party to the scheme.
Deferred Prosecution Agreements
The SFO's investigation into SL/SGL concluded in 2019. Whilst the SFO decided that it could have prosecuted SGL on charges of fraud and false accounting under the identification principle, as a result of numerous factors (including the Serco Group's substantial co-operation with the SFO's investigation and the lack of any history of similar conduct on the part of the Serco Group), the SFO and SGL agreed to enter into a DPA.
A DPA is an agreement between a UK prosecuting authority and a company, under which a corporate prosecution (for bribery, fraud or other economic crime) is suspended for a defined period provided that the organisation meets certain specified conditions. It is used as an alternative to prosecuting a company in certain circumstances, and must be concluded under the supervision of a Crown Court judge, who must be convinced that the DPA is in the interests of justice and that the terms are fair, reasonable and proportionate. A DPA is accompanied by a Statement of Fact (SoF) which outlines the facts and evidence obtained by the SFO supporting the allegations and charges brought against the company. The company must agree with and accept the contents of the SoF in order to enter into a DPA. Whilst this may not necessarily amount to an express admission of guilt by the company, it is a recognition of corporate criminal liability.
The principal benefits to the Crown of having a DPA route is that it ought to: (i) encourage corporates to self-report criminal wrongdoing and to co-operate with the prosecutor's investigation; and (ii) achieve a satisfactory resolution in cases where corporates are under lengthy investigations for complex economic crime, thereby avoiding lengthy trials at the public expense.
It is important to note that the starting point for a DPA is the same as for any corporate prosecution: namely, that there is deemed to be sufficient evidence against the company for a realistic prospect of conviction. Faced with what they are led to believe is a likely conviction, it would be sensible for companies to try to enter into a DPA; the advantages of doing so include the avoidance of a corporate prosecution and conviction, and the cost, time, reputation and business savings that accompany this. To benefit from a DPA, the SFO expects companies to show extensive cooperation, including early reporting of wrongdoing, sharing of evidence (often including waiving privilege over pertinent documents), and making reparations to the SFO by way of financial penalties.
Since their introduction in the UK in February 2014, the SFO has entered into DPAs with nine companies. The DPA with SGL was the fifth DPA and allowed for the suspension of SGL's prosecution provided that it met certain specified conditions (which included paying a financial penalty of GBP19.2 million). Judgment for the DPA was issued by William Davis, J. in Southwark Crown Court on 4 July 2019. Judgment was based on a SoF, which, although filed with the Court in June 2019, was only published by the SFO on 28 April 2021 once reporting restrictions were lifted (in order to avoid prejudicing the subsequent trial of those individuals implicated in the wrongdoing).
The SoF included reference to the evidence relied upon by the SFO in support of its prosecution of SGL under the identification principle. Crucially, those facts were admitted by SGL - including that: (i) the criminal wrongdoing was committed by the two former SGL directors Serco directors (whose identities were anonymised in the SoF as “SGL Director 1” and “SGL Director 2”); and (ii) these two directors were the “directing minds” of SGL.
Case against Messrs Woods and Marshall
On 30 March 2021, almost two years after the DPA with SGL was concluded, the criminal trial against “Directors 1 and 2” from the Serco DPA commenced at Southwark Crown Court before Mrs Justice Tipples. The former SGL directors, who faced a joint charge of fraud in relation to the alleged over-invoicing scheme (both of whom denied the charges), were: (i) Nick Woods (finance director of SGL between 1 March 2010 and 31 May 2012); and (ii) Simon Marshall (operations director of SGL between 31 May 2012 to 30 April 2013) (Defendants).
During the trial, the Defendants' defence teams told the Court that SL's methods of paying charges to SGL in order to depress its profit margin was a legitimate accounting method that was commonly used by large companies to shift profits within a group of companies, and one which was sanctioned by Serco's senior managers.
The trial was initially listed for nine weeks. However, on 26 April 2021, the case against the Defendants spectacularly collapsed. Having reviewed its own work, the SFO admitted that it had erred by not disclosing certain materials after identifying that its officials had incorrectly classified board minutes that showed the Defendants were working with the knowledge of their superiors. Unable to offer any further evidence, the SFO applied to adjourn the case so that it could conduct a review of all the evidence pending a retrial. Mrs Justice Tipples refused the application and explained to the jury that the prosecutors' view was that issues identified had “undermined the process of disclosure in the case to the extent that the trial cannot safely and fairly proceed.” She also said that “…it could well be over a year before the review process has been completed by the prosecution and the matter listed for a retrial.” Importantly, she went on to state that, irrespective of the merits of the SFO's application to delay the trial, she had “…real concerns in relation to the nature of the prosecution case against these defendants.” As a result, she refused the application to adjourn and directed the jury to return 'not guilty' verdicts against the Defendants.
A spokesman for the SFO stated that it was considering how best to undertake an assessment to prevent the issues presented in the case from happening in the future.
The collapse of the trial against the Defendants brought a rather humbling close to the SFO's eight year investigation (one which involved the review of c. 1.3 million documents at substantial expense to UK taxpayers). The verdict (following the decisions in Sarclad, Tesco and Güralp) exemplifies the difficulties the SFO has faced in successfully prosecuting any individuals in relation to conduct for which the corporations have already accepted criminal liability (through DPAs) for acts committed by those individuals. The verdict also shines a spotlight on the recent issues that the SFO has faced generally, for example, in achieving successful corporate prosecutions (e.g. in the SFO v Barclays prosecution), and for failing to bring any charges against individuals to trial at all in recent aviation sector cases.
In January 2013, Sarclad, an SME that supplies technology products for the metals industry, self-reported to the SFO that it had identified a number of its contracts were tainted by bribery. Following an investigation, the SFO concluded that it had sufficient evidence to bring charges against Sarclad for corruption and a failure to prevent bribery by its employees. Instead, the SFO and Sarclad entered into a DPA (with SoF) on 6 July 2016,4 under which inter alia Sarclad accepted that a handful of its senior employees (its directing minds) and agents were involved in the systematic payments of bribes to secure 28 contracts in foreign jurisdictions during the period 2004 and 2012. Under the DPA, Sarclad agreed to the disgorgement of profits totalling GBP6.5 million.
The SoF accompanying the DPA named the three employees that were ultimately held responsible for committing bribery on behalf of Sarclad, a position with which the company agreed. The SFO subsequently proceeded to prosecute those employees for conspiracy to corrupt and conspiracy to bribe. However, on 16 July 2019, a jury at Southwark Crown Court acquitted the three individuals of all charges.
Tesco Stores Limited
In September 2014, Tesco disclosed to the SFO an allegation raised by a whistleblower who claimed that payments from suppliers were being manipulated to inflate the Group's profits by over GBP250 million. That same month, three senior Tesco executives were suspended from their roles, before being dismissed for gross misconduct two months later.
Following an investigation, the SFO charged Tesco with fraud and false accounting by virtue of that fraud being committed by those three senior executives (the directing minds), who were deemed to have been aware of the overstatement of profits and who dishonestly perpetuated it. The SFO and Tesco subsequently entered into a DPA, under which Tesco agreed that all three senior executives were responsible for committing the fraud; paid a financial penalty of c. GBP129 million; and agreed to implement a robust compliance programme by way of remediation. The SoF accompanying the DPA5 named all three senior executives.
The SFO subsequently prosecuted the three executives on charges of fraud and false accounting. That trial was abandoned in February 2018 when one of the executives suffered a heart attack and was severed from the trial. A trial of the other two executives continued later that year, where, on 2 November 2018, they were both acquitted of all charges after the judge ruled that they there was insufficient evidence to proceed. That decision was endorsed and ultimately upheld by the Court of Appeal on 5 December 2018.
On 23 January 2019, the third executive was also acquitted of all charges after the SFO offered no evidence against him. The Tesco DPA (and SoF) naming the three executives as culpable for Tesco's criminal acts was published later the same day once reporting restrictions were lifted.
Güralp Systems Limited
Güralp is a small UK seismology company. In 2015, it self-reported suspicions of bribery to the SFO and the US DOJ. Following its own investigation, the SFO found evidence identifying that, between 2002 to 2015, through three of its senior employees, Güralp had made payments totalling c. GBP1 million to a South Korean public official in return for GBP2 million worth of contracts.
In July 2017, the public official was convicted in the US for laundering the proceeds of bribes. The US DOJ's press release stated that the evidence at trial included numerous emails in which the public official admitted acting illegally by accepting bribes.
The SFO subsequently charged Güralp with conspiracy to corrupt the foreign public official by virtue of the payments made by its senior employees (the directing minds). Güralp accepted the charge, and entered into a DPA6 with the SFO, under which inter alia it agreed to pay a disgorgement of profits of GBP2 million.
The SFO subsequently brought charges against the three employees for conspiracy to make corrupt payments. They were all acquitted, however, when their criminal trials resulted in not guilty verdicts, the last of which was returned on 20 December 2019.
Seven years after the introduction of DPAs in the UK, and following the agreement of nine DPAs to date, the SFO is now four from four in terms of attempting, and failing, to successfully prosecute individuals in relation to conduct for which their employers had already accepted criminal liability. Sarclad, Tesco, Güralp and Serco all admitted corporate liability on the basis that the guilt of individuals made the companies liable. Irrespective of that, the SFO has been unable to obtain convictions against those individuals. It is striking that the evidence presented to the court for a DPA is subsequently failing to hold up before a jury or being deemed insufficient by judges when the SFO attempts to prosecute the individuals.
Whilst it may seem incongruous for contradictory outcomes to be reached in relation to the same sets of evidence, the cases highlight the very different considerations between conducting a court-approved DPA with a company versus prosecuting individual executives.
- Standard of proof. The standard of proof required for the SFO to enter into a DPA is lower than if the case were to be prosecuted – whilst the SFO need only be convinced that it has sufficient evidence to show that there is a realistic prospect of conviction in order to bring an application for a DPA before a judge, a jury needs to be convinced beyond reasonable doubt in order for a conviction to be secured.
- Tactical considerations. Companies may make a pragmatic decision to accept a DPA rather than face a lengthy, costly and reputationally damaging trial. By contrast, individuals may well fight for their reputation and liberty.
- SFO's investigatory practices. In the DPA process, there is less or no analysis of the SFO's investigative methods and record-keeping. As such, evidence that looks strong enough on paper to convince a company to enter into a DPA may appear very different after forensic deconstruction during the criminal trial.
A concerning trend
Whilst every case turns on its own facts, the acquittals in the aforementioned cases raise a number of concerns regarding the way they are handled and the DPA process, as well as the possible erosion of the attractiveness of DPAs to corporates.
Impact on Individuals’ reputation. With the publication of a DPA disclosing the names of senior employees purportedly involved in criminality, in circumstances where those employees are acquitted, there is concern that the DPA process may not sufficiently protect the reputation of individuals found not guilty following due process.
Unfairness for individuals and SMEs. Unlike in the US where DPAs are available to corporations and individuals, in the UK they are only available to corporations. This raises a question over whether it is fair for prosecutions against companies to be deferred on the back of the company agreeing that its employees committed some criminal wrongdoing, whilst those very same employees are not afforded any such options. This invariably leads to scenarios where the company appears to get off relatively lightly, leaving its employees to suffer the financial, physical and emotional ruin of a criminal trial. Likewise, due to the relative ease of identifying the “directing minds” of SMEs over those of large international corporates, smaller companies face a much greater prosecution risk. Going forward, this may increase reluctance to take up senior corporate posts, especially at SMEs, because of the personal risks involved.
Areas for reform. Should corporates resist entering into DPAs as a result of their belief (rightly or wrongly) that the SFO will be hard-pressed to successfully prosecute them under the identification principle, the SFO may need to rely on “failure to prevent” offences in order to secure corporate convictions. Whilst such offences exist in relation to commercial bribery and the facilitation of tax evasion , they are absent in the context of other offences, such as fraud and economic crimes, which will invariably accelerate cries for reform in this area. Similarly, there may also be cries for reform from SMEs to ensure that the prosecution risk for them in comparison to large international companies is fairer and more transparent. This could be achieved, for example, by giving policy directions to prosecutors requiring them to carefully consider whether it is really in the public interest to prosecute an SME, and requesting that SMEs are offered DPAs wherever possible. Finally, there may also be calls to make DPAs available to individuals to afford them the opportunity to benefit from a DPA rather than facing criminal prosecution and/or to challenge their inclusion within the prose of the DPA entered into by the company.
Early Evidential Review. The SFO's recent failures to obtain convictions against individuals representing a corporate's “directing mind” ought to lead corporates to examine the quality of evidence the SFO produces against them and assess whether that evidence would stand up before a jury in court. Detailed and early advice on the likelihood of a successful defence at trial may well be beneficial and ultimately significantly cheaper than accepting and paying a financial penalty under a DPA.
Impact on DPA Attractiveness. The inability of the SFO to convict individuals risks undermining its policy of encouraging corporate self-reporting and co-operation. Where corporate liability is predicated on the individual guilt of senior directors who may be likely to be acquitted at trial, why should the company enter into a DPA at an early stage (and, in doing so, admit corporate liability and pay significant fines) instead of putting the SFO to proof and taking its chances with an investigation or even prosecution? Has the SFO's proverbial stick been blunted? In any event, before entering into any rash decisions about entering into a DPA, a company should always ensure that it has received full and detailed advice on the merits of doing so.
1SFO v Sarclad Limited (6 July 2016)
2SFO v Tesco Stores Limited (10 April 2017)
3SFO v Güralp Systems Limited (22 October 2019)
4Reporting restrictions were only lifted on 16 July 2019 once the employees were allowed to be named.
5These were dated 10 April 2017, but were only published on 23 January 2019 at the conclusion of the trial of the three Tesco executives.
6The DPA/SoF were dated 22 October 2019, but were only published on 20 December 2019 at the conclusion of the trial of the three Guralp employees.
7See s. 7 of the Bribery Act (2010) and ss. 45 and 46 of the Criminal Finances Act (2017)