Unprecedented external scrutiny in latest UK DPA
On July 17, 2020, Mr. Justice William Davis granted final approval to the UK Serious Fraud Office’s ('SFO') eighth Deferred Prosecution Agreement ('DPA').
For companies awaiting the first Canadian DPA under the Remediation Agreement Regime (‘RAR’), the DPA agreed between the SFO and G4S Care & Justice Services (UK) Limited (‘G4S C&J’) represents an important decision as the agreement contains provision for an unprecedented level of external monitoring and scrutiny significantly greater than any DPA previously approved by the UK courts.
We have previously highlighted that the terms of DPAs can include onerous commitments, such as agreeing to extensive monitoring of the organization’s activities going forward. In this regard, the G4S C&J DPA represents the most significant encroachment into a company’s future through monitoring pursuant to any DPA so far agreed to in the UK. In the United States, independent corporate monitors have become a common feature of DPAs entered into by the Department of Justice and it will be interesting to see whether the G4S C&J DPA represents the start of a trend towards increased US-style intensive monitoring in the UK.
In Canada, corporate monitoring is provided as an option under the RAR, but it is as yet unclear whether frequent use will be made of this part of the legislation. It is important to remember that judicial oversight of DPAs in the UK is also reflected in the Canadian legislation and therefore the role of corporate monitors could be scrutinized by courts in Canada. Mr. Justice Davis restated Lord Justice Leveson’s comments in the first UK DPA judgment that the “court retains control of the ultimate outcome”: “In contra-distinction to the United States, a critical feature of the statutory scheme in the UK is the requirement that the court examine the proposed agreement in detail, decide whether the statutory conditions are satisfied and, if appropriate, approve the DPA…”. Likewise the role of monitoring in Canadian Remediation Agreements may ultimately be defined and developed not only by the prosecutors and companies negotiating such agreements, but also by judges.
The G4S C&J DPA
The G4S C&J DPA is the second UK DPA to emerge from the electronic tagging controversy in the UK (a previous DPA between the SFO and Serco Grafix Ltd (‘SGL’) was approved by the same judge in 2019). An investigation was opened by the SFO into the practices of G4S C&J in November 2013 following a referral by the Justice Minister after a departmental review found that the company had overcharged for electronically tracking the movements of individuals originally on bail or subject to home detention curfew who had subsequently moved abroad, returned to prison, or died. The company subsequently reported to the SFO that it had discovered material which indicated that it had failed to provide accurate financial reports to the Ministry of Justice (“MoJ”) in respect of certain electronic monitoring services contracts.
G4S C&J accepted responsibility for offences under the UK Fraud Act 2006 against the MoJ arising from a scheme – similar to that practiced in the SGL case – to deceive the MoJ as to the true extent of G4S C&J’s profits between 2011-2012 from its contracts for the provision of electronic monitoring services. The scheme was essentially designed to prevent the MoJ from attempting to decrease G4S’s revenues under those contracts.
Notable features of this DPA
G4S C&J accepted responsibility for the three offences of fraud. The DPA required G4S C&J to pay a financial penalty of £38.5m and the SFO’s full costs of £5.9m. It was agreed that the amount of profit unlawfully obtained by G4S C&J from the fraud amounted to £21.3m. However, it was also agreed that compensation to the MoJ had already been paid by the company as part of an earlier civil settlement amounting to £121.2m in 2014.
The terms of the DPA bind G4S C&J for a period of 3 years to wide-ranging compliance obligations and improvements, including periodic review, assessment and reporting of its internal controls, policies and procedures by a third party reviewer. Furthermore, these compliance obligations and improvements were extended to G4S C&J’s parent company, G4S plc – a major UK government supplier.
The SFO described the compliance obligations as offering “unprecedented, multi-year scrutiny and assurance” regarding the future corporate conduct of the parent company, G4S plc. This view was echoed in the judgment of Mr. Justice William Davis who described the “intensity of the external scrutiny as set out in the DPA is a greater than in any previous DPA.” The need for such scrutiny was said by the judge to be necessary and appropriate given the exposure of G4S C&J and its parent company to government contracts.
We recently summarized the remedial and monitoring provisions contained within the SNC Lavalin Probation Order agreed to in connection with the company’s December 18, 2019 guilty plea to fraud under section 380 of the Criminal Code. Those provisions included the appointment of an External Monitor providing periodic reports over a 3-year period. Although agreed to in the context of a guilty plea, the SNC Probation Order monitoring provisions are likely indicative as to what type of monitoring may be negotiated under a future Canadian Remediation Agreement.
The nature and extent of the monitoring steps included within the G4S C&J DPA are similar to those agreed to by SNC Lavalin, namely: the appointment of an independent person as Reviewer of the corporate renewal being undertaken by G4S; and the provision of reports by the Reviewer to the SFO identifying any additional steps which G4S should take to ensure that their internal controls, policies and procedures meet defined criteria intended to prevent any fraudulent or corrupt practices. Similar requirements are contemplated under the RAR in Canada pursuant to Subsection 715.34(3) of the Criminal Code Part XXII.1 which provides for compliance measures and independent monitoring of companies subject to Remediation Agreements.
In the UK context, G4S demonstrated the importance of engagement with the UK Government on the issue of remedial efforts pursuant to the “self-cleaning” provisions of the UK Public Contracts Regulations 2015 – this arises where a company provides evidence of measures taken which demonstrate the company’s reliability despite the conduct which would justify exclusion from public procurement. As a result, G4S remains eligible to continue to bid for public contracts in the UK.
Co-operation in investigations and prosecutions
The DPA further binds G4S C&J to co-operate, firstly, with any or all SFO pre-investigation, investigations, and prosecutions during the life of the agreement, and, secondly, to co-operate at the request of the SFO with any other domestic or foreign law enforcement and regulatory authority/agency in any investigation or prosecution of its present or former officers, directors, employees, agents, and consultants, or any third party, in any and all matters relating to the company’s conduct which is the subject matter of the three offences of fraud for which it accepted responsibility under the terms of the DPA.
We have previously expressed concern regarding a similar obligation that must be included in any Remediation Agreement in Canada – pursuant to Subsection 715.34(1)(d) of the Criminal Code Part XXII.1 (imposing an obligation to cooperate in any “investigation, prosecution or other proceeding” in Canada and, if the prosecutor requires it, elsewhere, that results from the act or omission subject to the remediation agreement). Companies in Canada should carefully assess the risk and likelihood of any foreign prosecutions that could make the negotiation of a Remediation Agreement inadvisable.
The importance of self-reporting and full co-operation from the outset
We highlighted, prior to the advent of the RAR in Canada, our view that DPAs are more likely to be used where a company delivers a high level of co-operation to prosecutors. The outcome in the G4S C&J proceedings underscore this view. Companies should be alert to the possibility that only full co-operation at an early stage will result in the best possible outcome. In G4S C&J, although co-operation with the SFO investigation began at the outset, less than full co-operation resulted in a higher penalty than might otherwise have been the case.
The SFO investigation in relation to G4S C&J commenced in November 2013. In January 2014, G4S C&J reported to the SFO that it had discovered material which indicated that the company had failed to provide accurate financial reports to the MoJ. G4S C&J co-operated with the investigation from the outset, although it was noted by Mr. Justice William Davis that this was “less than full cooperation” until a relatively late stage in or around October 2019. Therefore, the terms of the G4S C&J agreement included a financial penalty discounted by 40%, representing only the second time in an SFO DPA that a discount lower than 50% has been applied. The 40% discount reflects the delay in G4S C&J’s substantial co-operation with the SFO’s investigation.
As we have previously noted , in order to successfully prepare the way for a Remediation Agreement, a key factor for companies is co-operation and a genuinely proactive approach by the company’s management when a potential offence comes to their attention, including reporting the offence and taking remedial actions.
As the G4S C&J case demonstrates, any delay in implementing a policy of full and early co-operation with the prosecution agency’s investigation could have significant financial consequences. If self-reporting is the correct and most strategically advantageous route to pursue for the company concerned, then it is vital that any voluntary disclosure be swiftly followed by early and full co-operation to ensure the best possible outcome in any Remediation Agreement negotiations.
Any company negotiating a Remediation Agreement should be in a position to demonstrate to the prosecuting authority that extensive remedial efforts were immediately implemented upon or shortly after the discovery of the offences, not merely after the commencement of the investigation. Such measures includes the immediate cessation of any potentially illegal conduct. The type of remedial efforts to be undertaken should, of course, be determined on a case-by-case basis.
It is therefore instructive to consider what remedial efforts G4S, the parent company, implemented as a result of the fraudulent conduct of its subsidiary. G4S noted that it had implemented, and would continue to implement a far-reaching programme of corporate renewal involving:
significant personnel changes (including replacement of the Chief Financial Officer);
the creation of a Board Risk Committee to oversee the most sensitive and important contracts held by G4S and its constituent companies;
a change in reporting lines so that financial officers and auditors within a company are required to report to Group officers rather than the leadership of the individual company;
expansion of the Group audit function with an emphasis on risk assessment; and
introduction of a 360 degree review process of all contracts with the UK Government.
Such remedial measures have a double-effect in the context of a Remediation Agreement. Firstly, they undoubtedly positively influence the decision of the prosecuting authority to offer a pathway leading away from a criminal prosecution, and, secondly, they are factors that can be relied upon to mitigate the potential penalties that are to be included in the resulting Remediation Agreement itself.
The G4S case demonstrates how vitally important the successful negotiation of DPAs can be to companies seeking to rehabilitate themselves in the eyes of governments and ensuring that they continue to be eligible for performing public contracts after being investigated for criminal wrongdoing.
The benefits of obtaining the DPA for G4S are immediately apparent as the company remains eligible for further government work and has already won significant contracts during the pandemic, including providing security at four of the emergency ‘Nightingale’ hospitals and at 15 drive-in COVID-19 test centres in the UK.
The level of monitoring imposed on G4S in the recently agreed DPA, which is unprecedented from a UK perspective, will likely become unexceptional as more DPAs are negotiated and concluded in the UK. This is because monitoring works both ways: it permits a company to demonstrate the steps it has taken to achieve corporate renewal but also provides the public with confidence that corporate offenders are being kept under ongoing scrutiny. Nevertheless, while monitoring is appropriate in some circumstances, there is a danger of ‘mission creep’ – excessive or overreaching monitoring, which is not reigned in by judicial oversight. Whether Canada’s first Remediation Agreement will include any or all of the optional monitoring clauses in the Criminal Code, and the degree of judicial activism involved in such terms, remain to be seen.
Serious Fraud Office v. Standard Chartered Bank plc,  11 WLUK 804 at Para. 4.
Serious Fraud Office v. Serco Geografix Limited,  7 WLUK 45.
Serious Fraud Office v. G4S Care & Justice Services (UK) Limited, Unreported, July 17, 2020 at Para. 43 found at: https://www.sfo.gov.uk/2020/07/17/sfo-receives-final-approval-for-dpa-with-g4s-care-justice-services-uk-ltd/
Serious Fraud Office v. G4S Care & Justice Services (UK) Limited, Unreported, July 17, 2020 at Para. 40 found at: https://www.sfo.gov.uk/2020/07/17/sfo-receives-final-approval-for-dpa-with-g4s-care-justice-services-uk-ltd/