The SFO secures approval of its eighth DPA with G4S Care and Justice Services (UK) Ltd

On 17 July 2020, Mr Justice William Davis approved a deferred prosecution agreement (“DPA”) between G4S Care and Justice Services (UK) Ltd (“G4S”) and the Serious Fraud Office (“SFO”). This is the eighth DPA entered into by the SFO to date (and the third relating to fraud charges). This marks the end of the SFO’s long running investigation into G4S for fraudulent practices in connection with Ministry of Justice (“MoJ”) electronic monitoring service contracts.

Background

Between 2005 and 2013, G4S (originally trading as Securicor Justice Services Limited) contracted with the MoJ (previously the Home Office until 2007) to provide electronic monitoring services. During the performance of the contract, G4S dishonestly misled the MoJ as to the true extent of its profits between August 2011 and May 2012 in order to avoid its contractual obligations to share the value of cost reductions.

In 2013, the then justice minister, Chris Grayling, asked the SFO to investigate G4S and rival Serco Geografix Limited (“Serco”) regarding their invoicing practices. This followed a departmental review which found they had been overcharging for the tracking of persons who had moved abroad, returned to prison or had died. The SFO concluded there was insufficient evidence that this overcharging had occurred dishonestly. However, in December 2013, the MoJ raised concerns with G4S in relation to its financial reporting required under their contract and in January 2014, G4S reported to the SFO that it had discovered evidence to indicate the company had failed to provide accurate financial reports to the MoJ.

Both Serco and G4S entered into civil settlements with the MoJ in 2014 but the SFO’s criminal investigations continued. In July 2019, Serco entered into a DPA with the SFO regarding fraudulent conduct in breach of s. 2 of the Fraud Act 2006 and false accounting. Under the terms of that DPA, Serco agreed to pay a financial penalty of £19.2m and SFO’s costs of £3.7m. Our Law-Now on the Serco DPA is here.

Some speculated that the failure also to conclude a DPA with G4S at that time suggested the SFO intended to prosecute. However, G4S’ announcement to the market on 10 July 2020 that it had agreed a DPA in principle put an end to such speculation. The court approved the DPA on 17 July 2020, a little over a year after the Serco DPA was concluded.

The offences

Under the terms of the DPA, G4S accepted responsibility for three offences of fraud contrary to s. 2 of the Fraud Act 2006 (i.e. fraud by false representation), relating to the submission by G4S of three separate financial models containing fraudulent representations as to costs incurred during the contract life-span. Unlike Serco, there were no false accounting offences covered by the DPA.

The facts

As the SFO’s investigation into potentially culpable individuals is ongoing, the court postponed the publication of the Statement of Facts that would typically be published alongside the DPA and judgment, which sets out in detail the agreed factual basis on which the DPA was agreed and approved. Despite this, the judge provided a summary of the facts as part of his judgment sufficient to enable the public to understand its basis.

G4S contracted with the Home Office in 2005 to provide electronic tagging and monitoring of alleged and convicted offenders in three regions in England and Wales (the other two regions being provided by Serco). G4S agreed to seek to reduce costs in provision of its services and it was agreed that the Home Office would be entitled to recover 50% of the value of any “unanticipated cost efficiencies” achieved by G4S over the life of the contract. G4S was required to submit a financial model to the Home Office every six months, in part to enable identification of cost savings to be shared. G4S also gave a warranty that statements and representations it made would be accurate.

The financial models submitted to the Home Office (and subsequently, the MoJ when they took over responsibility for the services in 2007) reported costs that were, in all cases, significantly higher than the costs as reflected in G4S’ management accounts. The charges in the draft indictment related to financial models submitted on 17 August 2011, 29 September 2011 (essentially another version of the August 2011 model) and May 2012, where the variances between the figures reported to the MoJ from inception and those recorded in the company’s management accounts rose to £70.7m by the time of the 2012 model. However, it was accepted that not all of this variance was due to fraud and G4S’ position was that £42,792,531 was incorrectly reported. Thus, half of that amount should have been shared with the MoJ.

It is implicit from the judgment that while G4S misreported its actual costs for the entire contract period, the SFO only considered there was sufficient evidence to fix corporate liability for the final three financial models (i.e. it could only demonstrate that the ‘directing mind and will’ of G4S was involved in the three models indicated, not all models submitted). However, as the relevant financial models reported all figures from inception, the DPA was able to take account of the full value of the fraud.

Under the civil settlement reached with the MoJ in March 2014, G4S paid a total of £121,268,715 to the MoJ, which included £22,115,505 representing the relevant 50% share of “unanticipated cost efficiencies” over the life of the contract – i.e. from April 2005 and December 2013. Despite the civil settlement, the SFO’s criminal investigation continued, culminating in the DPA. However, as noted above, the SFO is continuing to investigate individuals in connection with these matters, which may in due course result in prosecutions.

The interests of justice test

Mr Justice Davis considered the proposed DPA to be in the interests of justice, based on: its prompt reporting in January 2014; its cooperation with the SFO (albeit that the judge noted it was “less than full” cooperation prior to October 2019, at which point it agreed to provide access to all interviews and gave a limited waiver of privilege); the age of the conduct (it was neither recent nor continuing); and the remedial measures already taken by G4S’ parent company, G4S plc.

The remedial measures included implementing and continuing to implement a far-reaching programme of corporate renewal, significant changes to personnel, the creation of a Board Risk Committee, changes in reporting lines from business line to functional line reporting in order to ensure greater financial oversight, expanding the audit function and introduction of review processes for government contracts. The judge considered this “root and branch self-cleaning” was a particularly significant factor, particularly when coupled with the future improvements that the DPA provided for, which could not be replicated or achieved by a prosecution.

The judge considered these factors outweighed the factors that would suggest a prosecution was in the interests of justice, namely the initial lack of cooperation by G4S, the sustained period over which the fraud was conducted, the “very substantial loss to the public purse” and “substantial adverse impact on the confidence in the process whereby public functions are contracted out by HM Government”.

While the SFO had also referred to additional factors in favour of a DPA, namely, the disproportionate consequences that could flow from a conviction and the potential effects on the public, employees and shareholders of G4S in the event of a conviction, the judge was not satisfied that these were relevant factors here. He noted in particular that conviction for fraud would not result in mandatory exclusion from public contracts, but could result in discretionary exclusion where it was “guilty of grave professional misconduct, which renders its integrity questionable”. However, there was no material distinction between conviction following an early guilty plea and the admissions in the proposed DPA. Whether there should be any exclusion was ultimately a political judgment, not a legal one. Therefore, the judge was not persuaded by those additional factors.

DPA terms

The key terms of the three-year DPA were:

1. Payment of a financial penalty of £38,513,277 and the SFO’s reasonable costs of £5,952,711 within 30 days
2. The fine was calculated on the basis of G4S’ benefit of £21,396,265 – i.e. the 50% share of cost savings fraudulently not disclosed to the MoJ. This figure was treated as the baseline harm suffered. Following the Sentencing Guidelines for corporate fraud, this was subject to a 300% uplift for high level culpability. This was because the company had played a leading role in organised, planned unlawful activity and the fraud was a serious abuse of trust as a contractor receiving public funds. While there were both aggravating and mitigating factors that could lead to alteration of this uplift (attempts made to conceal the misconduct; substantial harm caused to the integrity of government vs no previous convictions; voluntary reimbursement of the sums lost; co-operation with the investigation; offending committed under previous directors or managers), the judge was satisfied that they cancelled each other out. There was no need to alter this figure further when “stepping back” and looking at the position in the round as there was no evidence that G4S lacked the means to pay or that it would cause unacceptable harm to staff or customers.
3. A discount of 40% was then applied to reflect G4S’ cooperation with the SFO’s investigation. This was less than the 50% discount that Mr Justice Davis (i.e. the same judge) had said in the Serco DPA judgment should be seen as the standard for DPAs that arose from self-reports with proper cooperation by the company. This lower figure reflected the fact that G4S’ level of cooperation had initially been less than ‘exemplary’.
4. No compensation or disgorgement was required, as this had already been provided for in G4S’ civil settlement with the MoJ in March 2014.
5. Improvements to compliance programme
   1. Regularly review and, where appropriate, adopt new or modify existing controls, policies and procedures to prevent and detect fraud, theft and bribery.
   2. By 31 March 2012, appoint a Group-level Head of Internal Audit and Compliance, who will sit on G4S plc’s board, be sufficiently resourced and will report to G4S plc’s Audit Committee Chair and CFO.
   3. Engage at their own expense an independent Reviewer (approved by the SFO – i.e. a monitor) to review the compliance programme (both initially and shortly before expiry of the DPA term), with their reports being provided to the SFO.
6. The DPA acknowledged the significant steps G4S and its parent company had already taken to improve existing and build new compliance controls. However, it also required G4S (and G4S plc via an undertaking – see below) to:
7. The judge said that “the intensity of the external scrutiny as set out in the DPA is greater than in any previous DPA” and it was an “important factor in providing reassurance to the SFO, to relevant government departments and to the wider public that both companies [G4S and G4S plc] have proper controls in place”.
8. An undertaking by G4S plc (G4S’ parent company) to maintain the compliance programme
9. This was similar to the undertaking given in the Serco DPA, however, the judge considered it more significant because G4S continues to trade in a substantial way. The culpable subsidiary subject to the Serco DPA had ceased trading. The wording of the undertaking has not been published alongside the DPA but the judgment said it would “ensure that the compliance measures [applied on a Group-wide level] are maintained and enforced”. The terms of the DPA make it clear that if G4S plc fails in its obligations under the undertaking, that does not absolve G4S of its liabilities under the DPA, which may be terminated in the event of a breach.
10. Continuing cooperation with the SFO and other investigative agencies
11. As has become standard, G4S agreed to cooperate with the SFO’s ongoing investigation into allegedly culpable individuals and with any other domestic or foreign law enforcement agency investigation. It also agreed to retain (in England and Wales) all materials gathered as part of its investigation for the term of the DPA.

Comment

Like previous DPAs (Serco in particular), we have again seen the use of a parent company guarantee in order to provide ongoing comfort that the subsidiary has mended its ways and will operate ethically going forward, in order to provide further justification of a non-prosecution outcome due to the wider benefits that would be gained. This was a novel feature of the Serco DPA and its use again for G4S suggests that the SFO may increasingly rely on this method to guarantee the most effective outcome from its agreements.

Once again, we have seen in this DPA reliance being placed on factors to support the interests of justice that raise at least one eyebrow. As noted above, one of the factors leading the judge to conclude a DPA was in the interests of justice was “the relative age of the misconduct”. The court noted that “Self evidently it is not recent and there is no continuing misconduct”. While true, it is an odd factor to treat as material in this case, where the wrongdoing was very much not historic at the time the investigation was opened by the SFO and which was opened in part because of concerns raised by the MoJ itself, which prompted reporting by G4S rather than truly proactively self-reporting. It seems that G4S gained a benefit from the SFO taking such a long time to investigate the matter (more than 6 years from the time it opened the investigation to the conclusion of the DPA – six times longer than the period of offending covered by the DPA). This seems unfortunate and the court (and SFO) might instead have avoided relying on a factor so open to criticism.

The investigation into allegedly culpable individuals continues and therefore, reporting restrictions apply. The DPA only relates to the potential criminal liability of G4S and does not address whether liability of any sort attaches to any employee, agent, former employee or former agent of G4S. It remains to be seen if the SFO can or tries to secure convictions of individuals, given its previously poor success rate following DPAs with corporates. It is notable, however, that the court agreed to delay publication of the Statement of Facts. Previously, there has been criticism against the approach of publishing Statement of Facts (even in redacted form) before the trial of individuals, given it can prejudice those trials and lead to a raft of legal issues when individuals identified as culpable in the Statement of Facts are later acquitted.