Choppy waters for the SFO? Key takeaways for corporates from the SFO's failed case against Serco individuals

The capabilities of the UK Serious Fraud Office ("SFO"), and the viability of Deferred Prosecution Agreements ("DPAs") have been called into question once again after the collapse of one of the SFO's most recent, and high-profile, trials on the 26 April.

A seven-year investigation into public service contractor Serco, has resulted in the now failed prosecution of Nicholas Woods and Simon Marshall, following a DPA agreed with Serco in 2019. The two former Serco executives were on trial accused of defrauding the Ministry of Justice between 2011 and 2013 by allegedly hiding £12m profits on government contracts to electronically tag prisoners.

The case collapsed on the basis of errors in disclosure, after the SFO failed to disclose particular documents to the defence. Judge Tipples described the errors as significant enough to "undermine the process of disclosure to the extent that the trial cannot safely and fairly proceed until…remedied". Troublingly for the agency, which has had a run of failed cases in recent years, the judge also stated that there were "real concerns in relation to the nature of the prosecution case".

The SFO is now under close scrutiny after multiple instances in which the agency has failed to secure convictions against individuals connected with a company which acknowledges wrongdoing by accepting a DPA. Indeed, there have been no successful prosecutions of any individuals where a DPA has been agreed. We consider here whether this picture now undermines the SFO's position, and the willingness of corporates to agree to such deals in the first place.

How will the case affect corporates who do business in the UK?

Introduced in 2014, DPAs allow corporates to accept wrongdoing via an agreement with a prosecution agency (and approved by the court) without the uncertainty of a prosecution and the financial and reputational impact of a conviction. A DPA is an attractive option for a corporate. It enables the turning over of a new leaf, while limiting commercial damage.  However, the DPA regime was never envisaged to replace the prosecution of individuals in appropriate cases.

Nine DPAs have been agreed in the UK but no successful prosecutions of individuals have taken place. In at least four cases, individuals were either acquitted or – of more concern – the prosecution's case collapsed as a result of disclosure or evidential issues. This raises significant questions about the actions of the SFO, and whether the cases were viable prosecutions at all.

A DPA is based on evidence which the prosecutor would rely upon, if the corporate were charged with a criminal offence. Yet the frequency of failed prosecutions of individuals raises questions as to whether a prosecution would have succeeded against the company and drives a concern that the SFO does not, in fact, have sufficient evidence to support the DPA. This concern could well encourage companies to push back when offered such an agreement, and limit their cooperation with enforcement agencies, aware that the risk of successful prosecution may be limited or that the evidence against them is insubstantial, inconsistent or based on an inadequate investigation. While a DPA is supposed to be a desirable alternative to prosecution, the reality of failed cases paints a different picture.

How will the case impact the enforcement of corruption and serious fraud matters in the UK?

Ultimately, if the likelihood of successful prosecution is diminished, UK plc and companies doing business in the UK may become more assertive and unwilling to accept a DPA. This would undermine the UK enforcement regime and damage the SFO's credibility.

The collapse of the Serco case on the basis of disclosure failings may raise doubts about the quality of the SFO's leadership and management, as well as its case-specific decision making and oversight.

While it is not unusual for serious fraud cases to run into problems with disclosure issues or evidential adequacy, the repetition of these issues in high-profile cases related to DPAs raises a question about the effectiveness of the DPA process itself.  Disclosure issues should be addressed by the prosecution significantly earlier in the process than when the case is in front of a jury. The impact of investigation and prosecution for serious fraud on a defendant cannot be underestimated and there is a responsibility on the SFO to bring cases only where there is a reasonable prospect of a conviction, and to manage its disclosure obligations effectively.

The failings also raise important questions about whether the SFO has properly identified, actioned and embedded the lessons from earlier mistakes. A 2019 report by HM Crown Prosecution Service Inspectorate highlighted "tolerance of neglectful approaches to management" and "inconsistent" attitudes to poor performance at the SFO and indicated that cultural issues in the workplace could be impacting efficiency.

What is the global impact?

The UK has been a leader in the field of DPAs, with other countries such as Singapore and Japan following the UK's example to establish their own DPA regimes. Recent events could damage the UK's reputation as an international role model in this area. Furthermore, in highlighting the possible weaknesses of DPAs, the collapse of the Serco case may undermine the global drive towards non-prosecution outcomes and the global enforcement of serious fraud and corruption.

Authors: Ruby Hamid, Ross Denton and Victoria Padley.