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Muddled DPA outcome for Tesco accounting fraud scandal
By Neil Hodge2019-01-25T13:00:00+00:00
On 23 January, former Tesco Finance Director Carl Rogberg was cleared of fraud and false accounting, ending a legal saga that has called into question the effectiveness of the U.K. Serious Fraud Office's investigatory powers and raises the question as to how it can be that a company can admit fraud but no one can be found responsible for it.
In September 2014, Tesco announced that it had overstated its profits by £250 million (U.S. $329 million). Following a two-year investigation that concluded in April 2017, Tesco paid a £129 million penalty (U.S. $170 million), a further £3m (U.S. $4 million) for the white-collar crime agency's investigation costs, and entered into a deferred prosecution agreement (DPA) with the agency. As part of that agreement, Tesco had to agree to a five-year compliance programme, which included creating a "commercial income governance body" to ensure that there is a consistent approach across the company about how it books revenue.
The company also had to cooperate in providing evidence to help the agency prosecute three of its former directors.
The first trial involving Rogberg and two other defendants—Chris Bush, Tesco's former U.K. managing director, and John Scouler, the former commercial director—was abandoned after Rogberg suffered a heart attack. A second trial, involving Bush and Scouler, collapsed in December after the judge at Southwark Crown Court ruled the evidence was too weak to put before the jury. Consequently, no individual has been found guilty of the fraud—and nor are they likely to, say lawyers.
Speaking outside the court, Rogberg said he believed he was "scapegoated" and that there was no black hole in Tesco's accounts in the first place. "We saw in court that it wasn't £250 million, it was a maximum of £118 million [(U.S. $155 million)]," he said. "And of that £118 million, no fraud has been proven at all. Most of that, in my opinion, is just a different accounting judgment."
Besides which, he added, the accounts were "signed off by lots of independent parties" and the accounting problem only arose because new management came in and decided to make "a different accounting judgment."
The DPA, however—which was released shortly after Rogberg left court following reporting restrictions being lifted—points the finger of blame squarely at the three men who subsequently stood trial but whom were all acquitted.
"As it stands, any further assignment of blame to these individuals is akin to shutting the barn door after the horse has bolted. The Tesco result will raise questions about whether the DPA regime should be reviewed in order to prevent such anomalies from happening."
Iskander Fernandez, Partner, BLM
Ross Dixon, the partner at law firm Hickman & Rose who represented Bush throughout his trial, says "this case exposes a fundamental unfairness with DPAs and sounds an alarm call for anyone concerned with the proper functioning of the criminal justice system.
"We now have two contradictory outcomes: that of the criminal trial in which the allegations were dismissed for lack of evidence, and the DPA, based on the same allegations, which tells a different story. The discrepancy between these outcomes is deeply worrying and should particularly concern senior executives working … as they may find themselves acquitted of wrongdoing yet have their reputation publicly besmirched in an agreement between the SFO and the company under investigation."
Dixon says the problem stems from the fact that while DPAs are seen as a great outcome for the SFO, there is a risk that in pursuit of this goal, "the SFO has little incentive to properly test the assertions on which it is based."
"Despite being acquitted of all wrongdoing—and as a direct result of the DPA—the SFO now publishes a statement that in effect contradicts these not-guilty verdicts," says Dixon. "This is an unfair and extraordinary outcome and one that calls for urgent reform of the DPA process."
An SFO spokesperson said: "The charges in this case met the tests set out in the Code for Crown Prosecutors and were properly brought. This test was reviewed in advance of the second trial, and we were content that there was sufficient evidence to proceed and that the public interest was met in doing so."
Lawyers have mixed views of the effectiveness of DPAs and what they are meant to achieve.
Mike Rainford, business crime and regulation partner at JMW Solicitors, describes DPAs as "little more than a revenue generator," adding that they are "a financial tool whereby companies essentially buy their way out of a criminal conviction. It certainly isn't a positive picture of how the business is managed," he says.
A history of the U.K. DPA
A U.K. Deferred Prosecution Agreement (DPA) allows a prosecution against a company for fraud, bribery, and other economic crime to be suspended for a defined period, provided the organisation meets certain specified conditions. If the company fails to adhere to these conditions, the SFO can decide to prosecute.
In essence, DPAs help companies avoid criminal convictions (and dents to their reputations) while the SFO avoids lengthy and costly trials.
So far within their five-year history, however, only four have been completed (Standard Bank, a company known as "XYZ," Rolls-Royce, and Tesco)—and only one of them has been fully complied with (Standard Bank's DPA was completed last November).
Lawyers had hoped that the introduction of DPAs would speed up the turnaround of bribery and corruption cases, while the SFO had hoped it would help it achieve a healthier success rate. Neither has happened yet. Some lawyers have also pointed out that the SFO's failure to agree to a DPA with Barclays Bank over its Qatari loans during the financial crisis shows companies are unwilling to fully cooperate and are prepared to take a punt in court instead.
The SFO's recent dismal track record might give more companies courage to do the same: Charges against Barclays and its subsidiary were scrubbed in October (though the trial against four former executives—including a CEO—is currently underway); and earlier this month, the SFO announced it was no longer investigating some of the individuals involved in the Rolls-Royce bribery case. Meanwhile, a decision to issue charges against the Kazakh mining group ENRC and/or against individuals has yet to be made after a five-year investigation.
The SFO's slow pace is not lost on its new director. In December, Lisa Osofsky told the U.K.'s House of Commons justice committee she wanted to make greater use of "flipping" witnesses so the agency could get insiders to cooperate with investigators to speed up criminal probes.
—Neil Hodge
Rainford believes the case highlights a number of worrying issues regarding how high-level white-collar crimes are prosecuted in the United Kingdom. "The SFO has only won around 50 percent of the cases it has brought so far, which is incredibly poor—bearing in mind the resources at its disposal."
Put simply, says Rainford, "it takes too long to bring cases to court, and they get stale. The SFO can improve its record by getting on with the job and focusing on what's really there."
Joanna Dimmock, a partner at law firm White & Case, says "DPAs have undoubtedly been a success for the SFO. One only needs to look at the size of the £500 million [(U.S. $659 million)] Rolls-Royce DPA to see how far the agency has come in terms of its ability in handling lengthy and complex multijurisdictional investigations and cross-border cooperation with other international agencies."
But she adds, "the difficulty with the DPA system is that the company is required to engage in and complete the DPA process at a very early stage of the investigation and realistically long before the extent of the evidence becomes clear. The prosecutor has a duty to continue to investigate and disclose material which assists both the prosecutor and defence as the case continues up to trial. Consequently, evidence may well later come to light that changes how the prosecutor is able to put their case in court."
Dimmock says the hurdle for the SFO in the Tesco DPA appears to be in the way it framed its case. "The Tesco charges amounted to accounting fraud. This offence requires the conviction of a senior executive, or 'directing mind' to bind the guilt of the corporate," says Dimmock. "In simple terms, the corporate cannot be guilty without the guilt of the senior executive. This means that if a corporate pleads guilty to such an offence at an early stage and secures a DPA, there is a risk that a jury, on examination of the complete and possibly fuller evidence later on, is not satisfied beyond reasonable doubt that the relevant individual was guilty," she says.
The SFO has recognised its shortcomings, as well as those inherent in the legislation, says Dimmock. The SFO has made it clear that it does not consider the current legislation fit for purpose and urged the House of Lords select committee in December 2018 for a new corporate offence of failing to prevent economic crimes. This would be very similar, says Dimmock, to the corporate offence under Section 7 of the Bribery Act 2010 (which relates to organisations' failure to prevent bribery) and would remove the "directing mind" hurdle. "This legislation would offer the SFO a lower threshold to investigate and prosecute corporates of any economic crime offence," she says.
Iskander Fernandez, white-collar crime specialist and partner at commercial law firm BLM, believes the SFO's mishandling of the Tesco case—as well as other cases (see sidebar)— might deter companies from considering the DPA route. Instead, he says, companies might feel brave enough to take their chances in court.
"As a result of what will be perceived as significant failures for the SFO, corporates may decide against cooperating with an investigation if they form the view that the SFO is not properly funded or is not equipped with the right people to pursue complex cases," he says.
Fernandez also says the SFO's DPA laying the blame on three individuals the courts have found not guilty of any crime might be counter-productive. "While it is a condition that a corporate must admit to the criminal wrongdoing which is being investigated in order to secure a DPA, such an agreement does not necessarily mean that connected individuals are presumed guilty," he says. "However, allowances should have been made in the Tesco DPA in the event the three former directors were found not guilty."
"As it stands, any further assignment of blame to these individuals is akin to shutting the barn door after the horse has bolted. The Tesco result will raise questions about whether the DPA regime should be reviewed in order to prevent such anomalies from happening," says Fernandez.
"Without that change, it may lead individuals to seek separate redress if they are found not to have played a part in any wrongdoing but are still named in the DPA that a corporate enters into. The SFO will now have some very important questions to contend with," he adds.
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