Deferred Prosecution Agreement - Parent Responsibility in the UK
Deferred Prosecution Agreement - Parent Responsibility in the UK
On 4 July 2019, Mr Justice William Davis approved the UK Serious Fraud Office (SFO) entering into a three year Deferred Prosecution Agreement (DPA) with Serco Geografix Limited (SGL). This is the first DPA which has come before the UK courts whereby a parent company has guaranteed undertakings given by a dormant subsidiary.
Under the terms of the DPA, SGL agreed to a large financial settlement and to provide continuing co-operation to the SFO and other agencies. However, as SGL is now a dormant company with no assets or revenue, the agreement with the entity is largely worthless. To give some teeth to the DPA, Serco Group PLC, despite not being the criminal wrongdoer, agreed to guarantee SGL's commitments and to provide additional undertakings to the SFO.
The parent company guarantee and undertakings are a first in the UK, and demonstrate the increased reach of this crime control device.
SGL's business had been the manufacture and supply of electronic monitoring equipment (commonly known as 'tags'). SGL's principal business was to service two contracts held by its parent company, Serco Limited (SL), for the supply of electronic monitoring services to the Ministry of Justice (the MOJ). Both entities are ultimately owned by Serco Group PLC, a global organisation with over 50,000 employees and a turnover of £2.8bn in 2018.
Towards the end of 2013, the MOJ raised concerns with the SFO that SL had rendered invoices, and been paid for monitoring services, in respect of non-existent individuals. On investigation, no evidence to support these assertions was uncovered. However, in reviewing the material, Serco Group PLC uncovered documentation which appeared to show that there had been a manipulation of accounting between SGL and SL designed to artificially reduce the profit margins reported to the MOJ.
Serco Group PLC self-reported the issue to the SFO and an investigation was launched into the matter. As detailed below, the SFO ultimately entered into a DPA with SGL resulting in closure of the prosecution.
What is a Deferred Prosecution Agreement?
Pursuant to schedule 17 of the UK Crime and Courts Act 2013, a DPA is a mechanism whereby for specified offences of fraud and dishonesty, a corporate body can enter into an agreement on terms negotiated with the 'designated prosecutor' (being, the SFO and the DPP in the UK ). The DPA is then approved by the Crown Court where it is (i) in the interests of justice; and (ii) it is fair, reasonable and proportionate.
The first UK DPA, involving Standard Bank, was entered into in 2015. Since then, a further four DPAs have been entered into with Rolls-Royce, Tesco, Sarclad Limited and most recently SGL. The largest of these, Rolls-Royce, involved a settlement sum of £497.25 million plus interest, being part of the agreement.
What about Irish Deferred Prosecution Agreements?
The Irish Law Reform Commission (the LRC) recommended in its Report on “Regulatory Powers and Corporate Offences” that a similar statutory DPA scheme be introduced in Ireland under the auspices of the DPP. Similar to the UK, it was recommended that an Irish DPA would require judicial approval by the High Court, applying the same test as outlined above (i.e. that (i) it is in the interests of justice; and (ii) is fair, reasonable and proportionate). Notably, reflecting the UK position, it is recommended that the DPA would be open only to a corporate body accused of serious economic crime, and not to individuals.
Designated Prosecutor – Two Stage Test
In the UK, the 'designated prosecutor' must apply the two stage test set out in the UK Code of Practice. In essence, the designated prosecutor must be satisfied that it has (i) sufficient admissible evidence to prosecute; and (ii) that the DPA is in the public interest. The LRC recommended that a similar approach be adopted in Ireland with the DPP publishing a Code of Practice setting out the applicable test.
In the present case, the SFO concluded that both the evidential test and the public interest test had been satisfied in relation to three offences of fraud and two offences of false accounting, arising from SGL's scheme of dishonestly misleading the MOJ.
Terms of the Serco Deferred Prosecution Agreement
In entering into the DPA, SGL took responsibility for the offences outlined above and committed to the following terms:
Payment of a financial penalty of £19.2m and the full amount of the SFO's investigative costs of £3.7 million;
Improvements to ethics and compliance policies and procedures; and
Continuing co-operation with the SFO and other investigating agencies.
SGL, as the corporate body to which the criminal liability attached, was the party which entered the DPA. It was a dormant company, unable to engage in any meaningful compliance programme and had no assets or revenue stream to satisfy the financial penalty or the SFO costs. With this in mind, Serco Group PLC agreed to guarantee SGL's commitments to the SFO. In addition, Serco Group PLC provided the following undertakings:
Co-operate fully with the SFO and any other authorities;
Strengthen the Serco Group-wide ethics and compliance functions;
Report annually on its Group-wide assurance programme; and
Report to the SFO any evidence of serious and complex fraud committed by anyone connected with the Serco Group;
Not transfer any substantial part of SGL's business operations without the written consent of the SFO.
Mr Justice Davis said "without the undertakings given by the parent company it is very unlikely that the goals of a DPA could have been achieved in the circumstances of this case. This is the first occasion on which undertakings of the kind made by Serco Group PLC have been [made] 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".
UK Court approval of the Serco Deferred Prosecution Agreement
In approving the DPA, Mr Justice Davis said "[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 requires early self-reporting to the authorities, full co-operation with the investigation, a willingness to learn lessons and an acceptance of an appropriate penalty" (emphasis added). Mr Justice Davis was satisfied that SGL, and indeed Serco Group PLC, satisfied this criteria.
It remains to be seen whether the Irish Government will heed the LRC's recommendations and move to enact legislation to place DPAs on a statutory footing in Ireland. The success of the SFO in holding the parent company to account underlines the even broader potential reach of DPAs in acting as an effective crime control device. It is also worth noting the comments of the English High Court about the importance of self-reporting, providing full co-operation and a willingness to learn lessons. Doubtless these concepts are of equal application in an Irish context.