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DEFERRED PROSECUTION AGREEMENTS: THE BEST OPTION? OR A FLAWED IDEA?

Tescoadmitted wrongdoing over its accounting scandal in order to obtain a deferredprosecution agreement and avoid a conviction. But with everyone charged overthe scandal having been cleared, Aziz Rahman examines whether the deferredprosecution agreement process needs revising.

Tesco has been associated for years with the advertising slogan “Every Little Helps’’.The supermarket giant may now be wondering if its deferred prosecution agreement was as helpful as it originally thought.

Last month,Carl Rogberg stood outside Southwark Crown Court after being acquitted of fraudin relation to the Tesco accounting scandal that led to £1.5 billion being wiped off the value of the company’s shares in one day. Rogberg was the last of three directors to be cleared in relation to the 2014 overstating of the company’s profits.

His acquittal meant that no individual has been found guilty of wrongdoing regarding the overstating. And yet Tesco admitted that there had been wrongdoing in orderto secure a deferred prosecution agreement (DPA) in 2017 and avoid being convicted.

Contradiction

The contradiction could not be clearer: the company has stated clearly and categorically there has been criminal behaviour and yet nobody has been held to account for it.

It is a situation which raises a number of questions.

* Was Tesco’s decision to admit wrongdoing in order to gain a DPA and avoid prosecution a mistake?

* Is the DPAsystem flawed, as it encourages companies to admit wrongdoing at the first hintof a criminal investigation?

* And does that approach then mean that individuals – in the Tesco case, Rogberg and two colleagues – are left to fend for themselves once the company has secured a precious DPA?

The answer to the third question would appear to be “Yes’’. The three directors were prosecuted while Tesco was not. The company had secured its DPA by April 2017;paying a £129M penalty for the accounting scandal but avoiding criminal prosecution. At that time, the three directors – Carl Rogberg, Chris Bush and John Scouler - were preparing for their trial; which began late in 2017 but was abandoned after four months when Carl Rogberg suffered a heart attack. With all three having subsequently been cleared, Chris Bush has now resumed an unfair dismissal case against Tesco.

Tesco and the SFO

But, to consider the first question, was Tesco wrong to admit wrongdoing? The answer may be more complex than a simple yes or no.

When a whistle blower alerted the company’s new chief executive to financial irregularities an internal investigation discovered that the company had artificially inflated an estimate of its profits. In September 2014, Tesco issued a trading update saying that it had overstated its expected profit for the half year by £250M. Subsequent investigation revealed that the overstatement was actually £284M. This meant that anyone buying shares and bonds in the company before this was announced would have paid a higher price than they should have done.

This resulted in the Serious Fraud Office (SFO) beginning an in investigation into Tesco,suspecting it of false accounting, as defined by Section 17 of the Theft Act 1968:

Where a person dishonestly, with a view to gain for himself or another or with intent to cause loss to another destroys, defaces, conceals or falsifies any account or any record or document made or required for any accounting purpose; or in furnishing information for any purpose produces or makes use of any account, or any such record or document as aforesaid, which to his knowledge is or may be misleading, false or deceptive.

Faced with the possibility of prosecution, Tesco entered into discussions with the SFO about the possibility of obtaining a DPA. Introduced under the provisions of Schedule 17 of the Crime and Courts Act 2013, DPA’s are available to the SFO and Crown Prosecution Service. As an agreement reached between a prosecutor and an organisation that could be prosecuted, a DPA allows a prosecution to be suspended for a set period of time provided that the organisation meets specified conditions.

The DPA

The attraction of a DPA to Tesco at that stage is understandable. It offered the company a chance to make amends for the criminal behaviour without having to suffer the reputational damage, loss of position in the market place and lengthy trial that a prosecution and conviction could have brought.

In April 2017, the SFO announced that it had entered into a formal DPA with Tesco PLC which related only to the potential criminal liability of the separate company Tesco Stores Ltd and not the PLC or any individual employees or agents. The total cost to Tesco PLC was £325m, including £85m towards a compensation scheme agreed with the Financial Conduct Authority.

Seven months prior to this Carl Rogberg, John Scouler and Christopher Bush were charged with fraud. In December 2018, Scouler and Bush were cleared when the trial Judge Sir John Royce found at the end of the prosecution case that the evidence was insufficient to secure any prospect of convictions. He went as far as to say: “I concluded that,in certain crucial areas, the prosecution’s case was so weak that it should notbe left for a jury’s consideration.”

With Rogberg’s case having now also ended without conviction, Tesco was left in a situation where it had paid out millions to avoid a conviction for wrongdoing even though the judicial system was unable to successfully prosecute anyone forthat wrongdoing. There may well be many observers, therefore, who believe that Tesco’s decision to admit wrongdoing in order to gain a DPA was a mistake because a successful prosecution would have been unlikely. But such a view can now be formed with the benefit of hindsight. At the time it was being investigated, Tesco did not have that benefit.

Admitting Wrongdoing

Which brings us to the second question: whether the DPA system prompts companies to admit wrongdoing when they could stand their ground and defend themselves.

The details of the Tesco DPA were published after Carl Rogberg’s acquittal. In it, Tesco effectively criticises its own senior management. The DPA refers to “clear evidence of what amounts to a serious breach of criminal law’’ that “implicates senior management’’. But now that all the senior management figures who were charged have been cleared there is a clear argument to be made that Tesco could have defended itself successfully rather than hold its hands up, admit everything and take the DPA on offer.

The fact that we are only now seeing the terms of a DPA that blames senior management after they have been cleared indicates that the process needs to be reviewed and revised. The Crime and Courts Act 2013, which introduced DPA’s, stated that a DPA should only be reached in the interests of justice. It is debatable whether that has happened with Tesco.

The Price of Business?

DPA’s were introduced as a means by which a company could correct its mistakes and move forward. There is little doubt that they can be of value in achieving this. But there has to be concern that, at present, the DPA process could be viewed by companies as simply the price to be paid for doing business – a way of evading conviction and continuing to trade while certain individuals are left to face the full force of the law.

Perhaps companies should hold their nerve instead of folding at the first hint of aDPA. Allegations can often be successfully challenged and companies can emerge from an investigation with neither a DPA nor a conviction to their name. But that requires resolve, careful consideration of all the legal possibilities and a determination not to go for the DPA because it is the flawed, easy option.

It could be argued that Tesco did what it thought best at the time. There is also a case tobe made that the SFO took the right course, as it ensured investors were compensated by Tesco and also sent out a message that even the directors at the biggest companies are not immune from prosecution.

It is still early days for DPA’s. There have only been four so far. But the process does appear to be in need of fine tuning to avoid any more contradictory outcomes like the one we have witnessed with Tesco.