SFO fines Serco £19m over fraud and false accounting

Outsourcing giant Serco Group is set to pay £23m including costs under a deferred prosecution agreement (DPA) with the Serious Fraud Office (SFO) over fraud and false accounting charges

The issue related to a scandal in the provision of electronic tagging services to the Ministry of Justice (MoJ).

The SFO said the DPA with Serco Geografix Ltd (SGL), a wholly-owned subsidiary of Serco Group, has been approved in principle, and the regulator will apply for final approval before a judge at Southwark Crown Court on 4 July.

The DPA will result in a payment by SGL of £19.2m and payment of the SFO’s costs of £3.7m.

The fine reflects a discount of 50% as a result of Serco’s self-reporting, as well as its significant and substantial cooperation with the investigation. The company has already paid compensation to the MoJ as part of a £70m civil settlement in 2013.

In entering the DPA, SGL has taken responsibility for three offences of fraud and two of false accounting arising from a scheme to dishonestly mislead the MoJ as to the true extent of the profits being made between 2010 and 2013 by SGL’s parent company, Serco Ltd (SL), from its contract for the provision of electronic monitoring services. The scheme was designed to prevent the MoJ from obtaining information to which it was entitled and from using this to decrease SL’s revenues under that contract.

The DPA will last for three years.  It is accompanied by an undertaking in which Serco Group assumes certain obligations including ongoing cooperation with the SFO and further strengthening of its group-wide ethics and compliance functions, as well as annual reporting on its group-wide assurance programme. Separately, Serco have agreed that this annual report will be provided to the Cabinet Office.

The matters that are the subject of the DPA were reported to the SFO by Serco in late November 2013. This followed the launch in October 2013 of an investigation into Serco and its employees in respect of the electronic monitoring contract, which initially focused on the question of whether SL had improperly invoiced and been paid by the MoJ for electronically monitoring subjects where no actual monitoring of those subjects had taken place. These matters are not the subject of the DPA and having been fully investigated, no criminal charges are to be brought against Serco based upon them.

Lisa Osofsky, SFO director, said: ‘SGL engaged in a concerted effort to lie to the Ministry of Justice in order to profit unlawfully at the expense of UK taxpayers. The SFO will pursue those who engage in this sort of criminal conduct so that they are held to account.

‘This resolution not only ensures such accountability, but also recognises SGL’s voluntary self-reporting of the misconduct, its and Serco Group’s substantial cooperation with our investigation and Serco Group’s extensive corporate reform and other remediation. It also provides substantial assurances regarding the future corporate integrity of Serco Group, one of the UK’s largest government contractors.’

The SFO said the prospective DPA concerns only the potential criminal liability of SGL, but does not address whether any liability of any sort attaches to any current or former employee or agent of SGL, SL or Serco Group. The investigation into individuals in respect of SL’s electronic monitoring contract continues, the regulator said.

Rupert Soames, Serco Group chief executive, said: ‘Those of us who now run the business are mortified, embarrassed and angry that, in a period between six and nine years ago, Serco understated the level of profitability of its electronic monitoring contract in its reports to the Ministry of Justice.

‘Serco apologised unreservedly at the time, and we do so again. 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 the group today.

‘Over the last six years we have worked extremely hard to regain the trust and confidence of government, implementing in its entirety a corporate renewal programme which was approved by government and which has helped us to transform our corporate culture, processes and governance.’

Aziz Rahman, senior partner at solicitors Rahman Ravelli, said: ‘What is most significant here is that this is the first DPA to relate to public contracts. That is why Serco has done so well to avoid a conviction. The fact that this has not happened here can be down to a number of factors.

‘The company has paid £19.2m and the SFO’s costs. But Serco has also cooperated with the SFO, made changes to its senior management and revised its approach to ethics and compliance. Such actions can be vitally important for a company looking to enhance its chances of gaining a DPA in order to avoid a damaging prosecution.

‘The company has clearly implemented a culture change regarding its approach to such offences and how they should be handled moving forward. The significant factor from here onwards may well be the ongoing monitoring of the company's internal controls and compliance programmes.’

In June 2016, the Financial Reporting Council (FRC) announced an investigation into Serco’s auditor, Deloitte, in relation to the preparation, approval and audit of the financial statements of companies at the Serco group for the financial years ended 31 December 2011 and 31 December 2012. The investigation is ongoing and in its statement Serco said ‘nothing in these matters impacts the previously reported statutory accounts of Serco Group’.

Pat Sweet

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