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Tesco investigation: SFO probes fraud and false accounting allegations
Practical Law UK Articles 8-633-7695 (Approx. 4 pages)
Tesco investigation: SFO probes fraud and false accounting allegations
by Morag Rea and David Bacon, Practical Law Business Crime and Investigations
| Published on 29 Sep 2016 • United Kingdom |
Three former senior directors of Tesco have been charged with offences of fraud and false accounting following an investigation by the Serious Fraud Office. The SFO launched the investigation into accounting practices at Tesco in October 2014 after the company admitted that it had overstated profits by £263 million because it had incorrectly booked payments from suppliers.
Three former senior directors of Tesco have been charged with offences of fraud and false accounting following an investigation by the Serious Fraud Office (SFO). Those charged have been requisitioned to appear at Westminster Magistrates’ Court on 22 September 2016.
The charges serve as a reminder to in-house lawyers that directors who sign off accounts are liable for them, even if a firm of accountants has produced them. The responsibility cannot be delegated (for background, see feature articles “Corporate criminal liability: looking across borders”, and “Corporate investigations: key issues for boards and in-house lawyers”).
Individual charges
The charges have taken almost two years to bring. The SFO launched the investigation into accounting practices at Tesco in October 2014 after the company admitted that it had overstated profits by £263 million because it had incorrectly booked payments from suppliers.
Three individuals have been charged with fraud by abuse of position, contrary to sections 1 and 4 of the Fraud Act 2006, and false accounting contrary to section 17 of the Theft Act 1968.
The individuals are all former senior executives of Tesco: Chris Bush, the former managing director of Tesco UK; Carl Rogberg, the former UK finance director; and John Scouler, the UK division’s former commercial director for food. The alleged criminal activity occurred between February and September 2014.
The SFO’s investigation into the accounting practices at Tesco continues. Tesco has stressed that it continues to co-operate with the SFO’s investigation and that the last two years have seen an extensive programme of change within the business, but given that the investigation is ongoing, it has not commented further.
Corporate charges
One of the more interesting developments will be whether the SFO seeks to bring charges against the corporate entity (see feature article “SFO enforcement: has the tanker turned?”). A company is capable of being a legal person and consequently prosecuted for both fraud and false accounting. The SFO would need to satisfy the identification principle; that is, be able to prove, to the criminal standard, that those aware of the criminal conduct are senior enough to speak for the company or represent its directing mind and will (Tesco Supermarkets Ltd v Nattrass [1972] AC 153).
During the course of this investigation, the SFO interviewed the former CEO and the former group head of buying, both of whom may be considered to be a directing mind.
It will normally only be senior officers of a company, who are at or close to board level, whose acts are capable of being identified with the company, not those who are acting merely as the company’s agents or servants. Ironically, Nattrass remains the leading authority on the identification principle.
Successful prosecutions of companies for fraud offences are rare in England and Wales. The SFO obtained its first conviction of a company after trial for bribery offences in December 2014 (see News brief “Bribery Act 2010: SFO concludes first deferred prosecution agreement”, ). That decision involved a small printing firm based in south-east England, Smith & Ouzman Ltd, and saw both the chairman and marketing director convicted.
In a speech in September 2016, David Green, Director of the SFO, commented that the identification principle operates unfairly, in that it is always easier to identify the controlling mind in a small company than in the case of a large one (www.sfo.gov.uk/2016/09/05/cambridge-symposium-2016/) (see box “Reforms to corporate liability”).
Identifying a directing mind within a company is not always straightforward, particularly in a world where decision making is increasingly decentralised and businesses frequently operate at a multinational level. It has been reported that the former CEO of Tesco, Philip Clarke, was questioned under caution by the SFO but will not be charged.
Deferred prosecution agreement
Should the SFO determine that there is sufficient evidence to charge the company, Tesco is likely to seek a deferred prosecution agreement (DPA) (see feature article “Deferred prosecution agreements: moving into the unknown”). One of the key components for seeking a DPA is the need to co-operate fully with the SFO.
Matthew Wagstaff, the head of bribery and corruption at the SFO, has said that co-operation is essential if there is to be a DPA and added that even the most serious instances can still merit a DPA. This public admission that no offending is too serious or too significant to disqualify itself from being dealt with by way of a DPA appears to be a further step forward for the SFO. However, DPAs also need judicial approval, and it remains to be seen whether the courts will share Mr Wagstaff’s view.
Further investigation
Other bodies may be undertaking their own investigations into Tesco. The Financial Reporting Council, the accountancy watchdog, announced in August 2016 that it had dropped an investigation into the former Tesco chief financial officer, Laurie Mcllwee, who had been interviewed by the SFO as a witness. However, its investigation into Tesco is ongoing.
Morag Rea and David Bacon, Practical Law Business Crime & Investigations.
Reforms to corporate liability
One alternative to the current law, which would avoid having to prove a directing mind, would be the introduction of a separate “failure to prevent” offence for economic crime coupled with a due diligence defence. David Green, Director of the Serious Fraud Office, has repeatedly spoken out in favour of extending the corporate offence of failure to prevent bribery under section 7 of the Bribery Act 2010 to other acts of financial crime. In his view, a failure to prevent economic crime offence would significantly increase the prosecutors’ reach in those cases where a company should be held to account for the conduct of persons associated with it, and it would also underpin the anti-corruption, responsible capitalism and social justice agendas, and the prosecutors’ contributions to those efforts.
A change in the law of this kind would make the prosecution of companies far easier to achieve and would increase the incentives for companies to enter into deferred prosecution agreements.
In May 2016, the government announced plans to launch a consultation on proposals to expand the failure to prevent offence to other economic crimes.