In the following guest post, Francis Kean takes a look at the lessons from the U.K. Serious Fraud Office’s recent attempts to criminally prosecute executives of companies that have entered into a deferred prosecution agreement. Francis is a Partner, Financial Lines, at McGill and Partners. A version of this article previously was published as an alert for clients of McGill and Partners. I would like to thank Francis for allowing me to publish this article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Francis’s article.

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Earlier this month two former senior executives at Serco were formally acquitted of fraud when the Serious Fraud Office said it would not be offering any further evidence in the trial. This is not the first time following an admission of criminal activity by a company in exchange for a deferred prosecution agreement (DPA) that the subsequent criminal proceeding against the individuals allegedly implicated in the crime has collapsed. Indeed, the SFO has also failed to secure a single conviction against an individual following any of the Deferred Prosecution Agreements which it has entered into with UK companies since the system was first introduced eight years ago by the Crime and Courts Act 2013.

Although the reasons for the collapse of this case (following an admission by a Serco subsidiary in 2019 of three offences of fraud and two of false accounting) appear to relate to errors made by the prosecution in its approach to disclosure rather than there necessarily being no case for the defendants to answer, it represents another serious set-back for the SFO. What if anything does it tell us about the risk of further such prosecutions being brought against senior executives?

There is a common and understandable assumption among company directors that, provided they have not been dishonest, they will be looked after by the companies they serve. They rely on their company both to indemnify them in respect of any liabilities they many incur and to buy adequate D&O insurance on their behalf. For as long as the interests of the director and the company coincide and provided the company remain solvent, this reliance is perfectly reasonable. It is where there is scope for divergence of interest or to put it more colourfully of being thrown under the bus that dangers may lurk for the directors.

Why Would a Company Throw its Directors Under the Bus?

Since the financial crisis in 2008, there has been a relentless focus by regulators and prosecutors on the theme of personal accountability at board level. The enhanced risk of follow on prosecutions against individuals after a company has admitted a relevant offence has been recognised ever since this new weapon was first introduced into the SFO’s arsenal. The temptation on a company which has unearthed probable criminal activity to enter into a DPA can be considerable since it offers an opportunity to protect its reputation, pay a fine, limit legal defence costs and move on. Unlike in the US, there is no equivalent of a DPA for individuals in the UK (although there has been some suggestion that they may be introduced in the future). A problem associated with this disparity is that the “stay of out jail” cards which DPAs offer companies, come with a specific price tag which is “cooperation” with the SFO. This term carries a specific meaning. In Guidance on this issue with respect to DPAs the SFO state:

“Considerable weight may be given to a genuinely proactive approach adopted by P’s management team when the offending is brought to their notice….. Co-operation will include identifying relevant witnesses, disclosing their accounts and the documents shown to them. Where practicable it will involve making the witnesses available for interview when requested. It will further include providing a report in respect of any internal investigation including source documents.”

The danger for individuals

In practice, in order for a company to avail itself of the considerable advantages of entering into a DPA, the “cooperation” required will extend to making available to the SFO, both oral and documentary evidence of those directors and other senior managers whom the SFO may wish to investigate. The product of the company’s own internal investigation must often also be provided on the basis that any legal privilege which the company may have over such reports is waived. The question as to whether any such individuals may later be interviewed as suspects or indeed prosecuted is almost always deferred and addressed as part of a separate investigation commenced after any DPA is agreed and sanctioned by the Court. If the decision to prosecute is taken, in a sense the directors have already lost. This is because, even if ultimately acquitted, they will have been subjected to the intense pressure of criminal proceedings and will have needed to access often very significant funds to mount their defence. The Serco case for example involved the disclosure of 1.3 million documents and the investigation itself began in 2013

 A Celebrated Case

Perhaps the best known example of a collapsed case against individuals following a DPA was the prosecution in January 2019, brought against a number of senior managers of Tesco, the well-known high street U.K. food retailer for fraud and false accounting. The case concerned the restatement by the company of its financials following disclosure of the fact that there had been a £250 million overstatement of its profits in the 2013-14 accounting period. The criminal offence which the company successfully persuaded the Court to defer in relation to this restatement was an offence of false accounting contrary to s.17 of the Theft Act 1968.

The director of the SFO stated he was satisfied that there was a realistic prospect of conviction of this offence. This was based on the allegation that the U.K. finance director was personally responsible for the truth and accuracy of the financial data submitted to head office, and that both he and others “were also aware of improper recognition of commercial income” but that despite the opportunity to put things right “….they failed to take any of these opportunities and instead concealed the true position”. The company paid a fine of £129 million in respect of the offence. The judge in the subsequent criminal trial against the individuals who were supposedly guilty of this offence directed the jury to acquit on the basis that the evidence against them was simply too weak.

Conclusion

Just because there have not yet been any successful DPA follow on prosecutions against individuals, this does not mean that they are not a cause for concern for directors. The aim is to avoid being caught up in criminal proceedings in the first place. Whilst that may not always be possible, access to the right legal advice at an early stage might make a significant difference. The Serco case took eight years to bring to trial and the costs probably run to millions of pounds. Perhaps the key take away for senior managers is that there is real value in taking personal responsibility at the time of their appointment for gaining an understanding of the triggers for and limitations of legal representation costs cover under both the company indemnity and the D&O insurance policy.