SFO’s fifth DPA introduces innovation of parent company undertakings as another DPA case fails to secure any individual convictions

United Kingdom

On 4 July 2019, a deferred prosecution agreement (“DPA”) between the Serious Fraud Office (“SFO”) and Serco Geografix Limited (“SGL”), a wholly owned subsidiary within the Serco Group was approved at Southwark Crown Court by Mr Justice William Davis. This is the first DPA not presided over by Sir Brian Leveson and the fifth DPA concluded by the SFO.

The “XYZ” DPA approved in 2016 was partly enabled by XYZ’s parent company financially supporting it to meet the DPA terms. (The reporting restrictions concerning that case were lifted this week when the prosecution (for conspiracy to corrupt and conspiracy to bribe) of the three individuals connected with that matter and employed by XYZ (real name Sarclad Ltd), concluded with all three being acquitted.

This new DPA goes further than XYZ in its reliance on parent company support, in that the court’s acceptance that a DPA (rather than prosecution) was the appropriate outcome was partly dependent on the actions and formal undertakings given by SGL’s ultimate parent company (Serco Group PLC) to (i) guarantee SGL’s financial obligations under the DPA, (ii) improve and report on group-wide anti-fraud/corruption controls, (iii) report to the SFO any serious and complex fraud subsequently discovered and (iv) cooperate in future investigations and prosecutions whether or not connected to the underlying subject matter of the DPA. Effectively, the DPA requirements have been imposed (by agreement through undertakings) on the ultimate parent company of the defendant entity.


SGL is a private limited company, which has been dormant with no expectation of future trading since January 2018. It is wholly owned by Serco Limited (“SL”), a major provider of services to the UK public sector. SL is an indirect wholly owned subsidiary of Serco Group PLC and represents a very significant part of the Serco group business.

SGL manufactured and supplied electronic tagging devices, used to monitor those accused or convicted of criminal offences. It serviced two contracts held by SL with the Ministry of Justice (“MOJ”) relating to electronic tagging, which had been in place since November 2004. The DPA in this case relates to those contracts, following a referral of certain concerns to the SFO by the MOJ. While those concerns were not substantiated, during its investigation Serco Group PLC discovered evidence of manipulation of accounting between SGL and SL designed to defraud the MOJ and, hence, the taxpayer. Those matters were reported to the SFO and ultimately became the basis of the DPA.

The offences

The offences covered by the DPA involved:

  1. Three counts of fraud under section 2 Fraud Act 2006, in relation to Financial Models submitted by SL to the MoJ in 2011, 2012 and 2013 (the Financial Model was a contractual mechanism whereby the MoJ could determine by reference to the revenues and costs it set out, whether they were entitled to share in any unanticipated cost savings that enabled SL to achieve profits above the originally anticipated 14% margin at the time of contracting); and
  2. Two counts of false accounting between 1 June 2011 and the 31 May 2013 (i.e. falsified journal entries in the SGL and SL SAP accounting records and false entries in the SGL Annual Report and Financial Statements for FY 2011) necessitated by the fraudulent manipulation of the Financial Models.

The facts

SL contracted with the Home Office in November 2004 to provide electronic monitoring services. The MoJ was created in 2007 and took over the contractual relationship with SL from that time. Under the contracts, SL levied charges to the MOJ based on the number of monitoring devices installed and on the number of enforcement actions taken for breaches of curfews by those being monitored. The marginal cost of supply would reduce as more devices were supplied, thus increasing available profits. There was no profit cap under the contracts, but the MOJ was entitled to share 50% of any “unanticipated cost efficiencies” above SL’s originally forecast profit margin at the time of bidding (which was 14%).

In fact, the contracts were significantly more profitable than this as more individuals were being monitored than originally anticipated. Internal presentations at SL identified the true profit margin to be 24% by late 2008. The total profit achieved above the agreed 14% margin was some £25.6m, meaning the 50% abatement due back to the MOJ would have been £12.8m.

The MOJ was supposed to be able to assess the position by reference to Financial Models (identifying the revenues and costs of SL under the contracts) produced by SL and submitted to the MOJ each year. However, pursuant to the fraudulent scheme, SGL charged fictitious costs of some £500,000 per month to SL from 2011 – 2013 in order to reduce the SL profit margin on the MOJ contracts below the 14% allowed, to avoid having to share any additional profits with the MOJ. These costs were described as the costs of equipment, staff and overheads. The MOJ was thus unaware of the additional profits.

SL paid the fictitious amounts to SGL but later received the monies back as dividends. (The judgment actually indicates that there was some evidence of earlier manipulations “of doubtful legitimacy” to reduce SL’s profits on the contracts by retrospectively recharging costs incurred elsewhere in the group (primarily SGL), but the charges do not relate to that conduct.)

While SL was the beneficiary of the fraud, there was insufficient evidence to prove its “directing mind and will” (a necessary pre-requisite for establishing corporate criminal liability for most criminal cases) was involved in the creation and facilitation of the fraud. However, the scheme required the knowledge and assistance of SGL and the court was satisfied that the evidence demonstrated its “directing mind and will” were party to that scheme, such that there was a clear case against SGL as a company. (While a DPA is supported by an agreed Statement of Facts, that document has not been made public at this time, due to potential prejudice it may cause to any future prosecution of individuals connected with these matters.)

Once Serco Group PLC discovered this issue and reported the matter to the SFO, it and SL reached a settlement in 2013 with the MoJ, which included a payment of more than £20m relating to the additional profits in which the MOJ was entitled to share.

They also promptly reported the wrongdoing to the SFO and provided substantial cooperation to the SFO in their investigation (including providing its external legal advisers’ investigation report following a full document review, agreeing not to interview witnesses and providing unrestricted access to email accounts and accounting material with some waiver of privilege).

These were important factors in favour of a DPA, rather than prosecution, coupled with the lack of any history of similar conduct (although as with most of the other DPAs to date, this was really just a reflection of the fact that long-term wrongdoing had not previously been discovered and so its real relevance as a weighing factor is questionable), the complete change of senior management at Serco Group PLC level, the age of the conduct and the remedial measures taken since it was discovered, involving a complete overhaul of its compliance controls at group level. As to this final point, Serco Group PLC had undertaken a Corporate Renewal Programme involving a revised Code of Conduct and training, strengthened contract-level governance, more prescriptive guidance on operational processes, strengthened risk management compliance and internal audit controls, improved Board level oversight, overhauled systems to ensure financial transparency (including KPIs) and numerous audits of culture, management systems, billing and servicing of high risk contracts. These factors resulted in the court being satisfied that a DPA was in the interests of justice in this case.

The SFO also highlighted the disproportionate consequences a conviction would have on SGL, but the Court did not accept this as a relevant factor that should impact on its assessment of the interests of justice (in contrast to previous DPAs such as Rolls-Royce where this was deemed a significant factor).

Terms of the DPA

The key terms of the three-year DPA were:

  1. Payment of a financial penalty of £19.2 million and the SFO’s reasonable costs of £3,723,679.00 within 30 days of the DPA, with no attempt to seek any tax reduction based on the financial penalty payment

SGL’s fine was calculated on the basis of its benefit of £12.8m (treated as the value of the harm suffered). Following the Sentencing Guidelines for corporate fraud, this was subject to a 300% uplift for high level culpability - the firm had engaged in deliberate and sustained wrongdoing while in a position of trust to the public, those factors being mitigated by the factors above justifying the DPA as being in the interests of justice. There was no need to alter this figure further when “stepping back” and looking at the position in the round.

However, the resulting sum (£38.4m) was then discounted by 50% to reflect SGL’s co-operation and self-reporting. Mr Justice Davis indicated that this figure should now be seen as the standard discount for self-reported DPAs with proper co-operation, both because of the time and cost saving that self-reporting brings and the need to corporate responsibility and early reporting.

No additional payment to reflect compensation to the MoJ or disgorgement of profits was required, as this was already provided for in the earlier financial settlement with the MoJ.

  1. Improvements to ethics and compliance policies and procedures

The court noted that while the DPA was concluded with SGA, that company was dormant and had no ability to pay any financial requirements, nor to deliver any meaningful future compliance improvements. The real thrust of the DPA was the extension through the undertakings given by Serco Group PLC – “The obligations accepted by Serco Group PLC are a key component of the DPA. Without the undertakings… it is very unlikely that the goals of a DPA could have been achieved”.

As part of the DPA, Serco Group PLC gave an undertaking to:

  • Modify its compliance programme to ensure that it maintains an effective system of internal accounting controls and a rigorous compliance programme incorporating policies and procedures designed to prevent and to detect fraud and bribery, this undertaking to apply throughout its business including its various subsidiaries.
  • To report annually in writing to the SFO during the currency of the DPA in relation to the progress of its compliance programme.

The undertakings made by Serco Group PLC mirrored the requirements imposed on SGL by the DPA. This was an important factor in justifying the DPA as SGL had become a dormant company and so any continuing obligations imposed on that entity were deemed to be of limited value by the court.

  1. Continuing co-operation with the SFO and other investigative agencies

Serco Group PLC also undertook during the life of the DPA to:

  • Co-operate fully with the SFO in any SFO investigations or prosecutions and to co-operate with any other domestic or foreign law enforcement or regulatory agency in any investigations or prosecutions of anyone (including present or former officers and employees) relating to the conduct which was the subject of the Indictment and described in the Statement of Facts.
  • Report to the SFO if it learns of any evidence of serious and complex fraud committed by anyone connected with Serco Group or any of its affiliates – whether or not related to the conduct which was the subject of the Indictment.
  • Not transfer any substantial part of SGL’s business operations without the written consent of the SFO.


This is a significant case in the development of DPAs, showing that they can be effective even where the defendant entity has limited means to meet any financial or other commitments, so long as wider benefits can be achieved through commitments offered by the defendant’s wider group.

This is the first DPA where undertakings were made by a parent company of the defendant, to enable that DPA to be concluded and justified as being in the interests of justice. It is also the first DPA where the defendant must disclose any future fraud discovered during the life of the DPA (and again, this was bolstered by an equivalent parent undertaking). This was important in demonstrating the level of co-operation provided over and above all that has gone before.

A DPA with a dormant company was deemed to be in the interests of justice because its parent company committed to valuable compliance improvements and guaranteed the financial terms of the DPA. This was a pragmatic and innovative solution as a dormant company has no ongoing business and so there was nothing for it to commit to doing in the future – by getting the parent to agree to equivalent improvements, there are real benefits gained in the public interest. This approach may set a precedent for future cases, particularly where a subsidiary is unable alone to meet the terms that are considered necessary to justify a DPA rather than a prosecution.

The approach in this case contrasts positively with the CPS’s approach to Skansen Interiors Ltd or “SIL” (see our Law-Now here), for which the CPS was criticised most recently in the House of Lords report on the Bribery Act: “The suspicion lingers that SIL was perhaps not fairly treated by the CPS either in relation to the prosecution or in relation to the refusal of a DPA.” Skansen had reported the underlying wrongdoing to the police as soon as it was discovered, and provided extensive assistance and cooperation to the police investigation, voluntarily furnishing company documents, including confidential reports and advice. Even with this extraordinary level of cooperation, the CPS was unwilling to pursue a DPA outcome, due to SIL’s dormant status and despite its parent company being willing to promise future compliance improvements across the group. It seems the SFO are more willing to reach more innovative and pragmatic outcomes in the public interest.

This DPA is also notable for the approach of the judge to arguments based on the potential disproportionate impact of a conviction on the defendant company, which received short shrift. The court indicated that it would not have been swayed to approve a DPA on the basis of this proportionality argument and noted that in truth the outcome of this case – whether DPA or conviction – would not affect the approach to debarment, given the discretions of public bodies in determining whether past conduct should prevent future tendering. Therefore, the debarment risk was not a relevant consideration for the court in deciding whether to approve the DPA.

It will now be interesting to see whether the SFO will proceed to prosecute any individuals connected to this matter, a topic of public interest, especially as no individual has so far been successfully prosecuted in connection with any of the DPAs concluded with corporates to date. Nobody was prosecuted in relation to Standard Bank or Rolls-Royce at all; the prosecution of individuals connected to Tesco was stopped by the court before the defendants had to present their defence. Now, earlier this week, the individuals prosecuted in connection with XYZ/ Sarclad Limited were acquitted following trial.

The fact that prosecutions of individuals have proven very difficult for the SFO successfully to pursue does not mean the DPAs to which they relate should not have been entered into; there may be a myriad of reasons why self-reporting and reaching a negotiated outcome in those cases was justified both legally and commercially (particularly in those cases where the corporate offence of failing to prevent bribery was available to the SFO and where there were wider regulatory issues in play). However, for those corporates unconvinced of the merits of self-reporting, the lack of successful prosecutions of the individuals whose conduct was said to underly the relevant DPAs is unlikely to assist in changing their minds and may lead them to look more sceptically at the process by which DPAs are concluded. At the same time, it may not assist the SFO in gaining support for their call to expand the corporate failure to prevent offences to other financial crimes – as those offences are still theoretically based on crimes having been committed by individuals in order to benefit the corporate (which the prosecutor would have to prove if a prosecution of such offences were contested by the corporate). If the SFO cannot persuade a jury or court that any individual was guilty of a relevant crime in cases which did result in DPAs, it is not clear how expanding the corporate offence concept will improve prosecution outcomes.

Finally, this DPA also serves as an important reminder that, where fraud is involved, achieving a civil resolution with the victim will not mean that criminal risk is avoided as well. While not covered in the judgment here, money laundering considerations can also affect a decision to self-report to the SFO or police if suspicious activity reports are deemed appropriate to be made to the NCA on discovery of a fraud. Once such reports or self-reports are made, substantial cooperation at significant time and cost to the corporate may be required to achieve a benign outcome with regulators and prosecutors; this DPA, for example, was concluded some six years after the civil settlement with the MoJ. Those costs can only be avoided through effective internal controls that help prevent the wrongdoing in the first place. Taking the time and effort (and cost) to develop such controls can be repaid many times over if they can help a corporate avoid the sort of issues Serco faced in this case.

For further information, see:

Serco judgment: https://www.judiciary.uk/wp-content/uploads/2019/07/serco-dpa-4.07.19-2.pdf

Serco DPA: https://www.sfo.gov.uk/download/deferred-prosecution-agreement-serco-geografix-ltd-sfo/