Deferred Prosecution Agreements: Sword of Damocles or joke shop dagger?

Deferred Prosecution Agreements (DPA) were brought into being in 2014 by the Crime and Courts Act 2013. They are supposedly a way of recognising criminal conduct in large companies where such conduct was either conducted or sanctioned by senior management. In return for a recognition that criminal conduct had taken place and a commitment to change, as well as the payment of a very large fine and the costs of the Serious Fraud Office, the indictment against the company is suspended, rather like the Sword of Damocles, over the company for a specified period.

Over the first five years of their existence, details of five DPAs have been published. Each time, the eye-catching level of the fine grabs the headlines and so the details get lost. Leaving aside those distracting sums for a moment, here are the five companies concerned and their offences:-

• Standard Bank (DPA November 2015, offences committed 2013)
  Failure to prevent bribery.
• Sarclad (DPA July 2016, offences committed 2002-2014)
  Conspiracy to corrupt, conspiracy to bribe.
• Rolls Royce (DPA January 2017, offences committed 1990s-2012)
  Conspiracy to corrupt, false accounting, failure to prevent bribery.
• Tesco (DPA April 2017, offences committed 2014)
  Financial misreporting.
• Serco Geographix Ltd (DPA July 2019, offences committed 2010-2013)
  Fraud by false representation and false accounting.

The criminal conduct is typically this: organised dishonesty for financial gain, either orchestrated or condoned at a senior level. But in order to qualify for a DPA, the company concerned then must have:-

• formally admitted these offences have taken place, with
• early self-reporting of the offences,
• cooperated with the SFO investigation, and
• shown a willingness to learn lessons and has implemented remedial measures.

As a result of these admissions and cooperation, the indictment against the company is suspended, and the fines imposed are also reduced accordingly, not to mention the SFO’s costs.

So far, so candid. No doubt, the corporate culture at those companies may have improved.

The elephant in the room is obviously this: despite these very frank admissions by their employers, no individual has ever been convicted of any of the offences which it has been agreed took place. In the first five years of DPAs, the pattern has been:-

1. the company accepts the offences took place and self-reports them to the SFO,
2. the company cooperates with the investigation and it is not prosecuted,
3. the company achieves a greatly reduced financial exposure due to that admission and its recognition of ‘lessons learned’ and its remedial steps, but
4. no employee or agent of the company is actually convicted for committing the crimes that both sides have agreed took place, and which were apparently reported early to the SFO by the employer.

This emerging pattern is surely not the SFO’s intended outcome, but it is the outcome nonetheless. The individuals whom it is agreed committed these offences are not being convicted and, in most cases, are not prosecuted at all.

Equally as concerning is the fact that very often, by the time the DPA comes into force, the executives responsible have already left the company. They might have moved on with their careers unscathed – we don’t know, because they might not be named. Not only does this mean they aren’t found criminally liable, it also means that they are completely unaffected by the ongoing DPA. The DPA hangs in place not over them, but over the former employer which continues taking remedial action, months or even years after its errant horses have bolted. In this manner, the Sword of Damocles dangles, but it dangles over entirely the wrong people. Is this really what was envisaged by Parliament in 2013?

Indeed, after the Standard Bank DPA in November 2018 the Director of the Serious Fraud Office said:-

“DPAs are a way of holding companies to account without punishing innocent employees, and are an important tool in changing corporate culture for the better”

What is meant by ‘innocent employees’? Doesn't the Director in fact mean that DPAs punish no employees, be they innocent or guilty? It would seem so, because no DPA can claim to have punished the guilty employees - particularly when they have left the company years before the DPA came into force.

Serco, the dishonest understating of profits, and the employees yet to be tagged.

The most recent DPA was applied to Serco Geographix Ltd (SGL). It was agreed in July 2019. In essence, SGL had bid for a government contract. In their bid, which was successful, SGL predicted a profit margin of 14%. The government included a clause in that contract which meant it could ‘claw back’ money if SGL’s actual profits were above a certain level. For three years, unnamed senior members of SGL’s team conspired to dishonestly under-state those profits so as to avoid having to pay the government its rebate. This fraud went on between 2010 and 2013, and was valued at £71 million. It seems Serco reported itself after three years in 2013, which the SFO deemed to be ‘early self-reporting’, an essential part of the DPA criteria.

As well as paying the money back in 2013, Serco Group (of which SGL was one part) had to pay large fines and SFO costs, and give an undertaking to improve its ethics and compliance policies. But this was all part of the DPA six years later in 2019. In the meantime, the horses had bolted. As Serco’s website so reassuringly explains:-

“Nobody who sat on the Board of Serco Group, or who was part of the Executive Management Team at the time these offences were committed works for Serco today”

Why wasn’t Serco’s accounting fraud spotted by external professionals? It took until 2016 for Serco’s auditor, Deloitte, to be investigated by the Financial Reporting Council. This was for Deloitte’s failure to spot Serco’s fraud. Three more years passed, and during in 2019, two partners of Deloitte were given fines of £97,500 and £78,000 for misconduct, with Deloitte itself fined £4.225 million. All of these sums had already been reduced by 35% to reflect the cooperation of Deloitte and its staff.

The SFO decision on whether the Serco Geographix Ltd individuals are going to be prosecuted is apparently due in December 2019. To reiterate:-

• their former employer Serco agreed that fraudulent accounting was going on,
• Serco specifically avoided an SFO prosecution due to its early cooperation and candour, and
• those responsible for auditing the accounts at Deloitte also admitted misconduct, cooperated, and had their FRC fines reduced accordingly.

Looking at the previous Deferred Prosecution Agreements, the current score is: DPAs 4. Convictions 0. So things are not looking promising as explained in Financial Times.

Surely the key question, which exposes the emerging problem with DPAs is this: If both the former employer, and the external auditor, are getting discounted penalties for cooperation in revealing a fraud, then what exactly is all this ‘cooperation’ actually supposed to achieve? Is it not to achieve the criminal convictions of those responsible? And if not, why not?

If DPAs are to be taken seriously as a tool against criminality, they need to start achieving leverage in securing criminal convictions. But if DPAs are in fact simply a revenue collection exercise for giving lip service after the horse has bolted, then they are surely more of a joke shop dagger than Sword of Damocles.

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