Outsourcing giant Serco committed fraud on a mass scale – and yet it's still propping up the state

Let’s say you run a small plumbing firm and you’ve been charging your local council for fixing 100 toilets a month when you have in fact fixed 80. Let’s say this you’ve been running this fiddle for three years. What do you think the consequence would be if it were to come to light through things getting unpleasant in the bathrooms of several tenants?

In all likelihood your business would be toast. It would probably never work for another local council, or anyone else. Nor would you, unless you were to be sent to a prison where the governor thought he could make use of your skills to get the pipes fixed on the cheap.

So outsourcing giant Serco must surely be in real trouble, right? After all, it’s just “taken responsibility” for three counts of fraud and two of false accounting between 2010 and 2013 relating to its electronic tagging contract with the Ministry of Justice (MoJ) which created a storm of controversy when it emerged that we taxpayers had been charged for the monitoring of people who were dead. Or in jail. Or out of the country.

You might perhaps have expected a rout on the stock market? Frantic calls from Whitehall? A busy week for the official receiver? The ghost of bust outsourcer Carillion haunting the government?

Except that’s not what happened at all.

Serco’s shares lost just under 4p (less than 3 per cent) in response to the news before quickly recovering most of the ground they had lost because when big companies cheat, they get to avoid too much unpleasantness if they offer to part with enough cash. Serco, you see, made its admissions as part of what’s known as a “Deferred Prosecution Agreement” or DPO.

Through this it has agreed to kick over £23m in penalties, which includes the costs the Serious Fraud Office incurred through investigating the case, and signed a promise to be good in future (compliance will be monitored). There is no “disgorgement”, which is the term used for reclaiming money fraudulently made, because the company has already paid £70m to the Department of Justice.

It did this not just to avoid a messy, expensive and potentially embarrassing trial raking over lots of embarrassing details and to get the (chunky) discount available to big firms that co-operate with the SFO. Serco also now gets to play the contrite card, and ensure that the flow of government work continues uninterrupted

CEO Rupert Soames, who was appointed after the offences took place, said he and his team were “mortified, embarrassed and angry” at what went on while touting how the company had “worked extremely hard to regain the trust and confidence of government”.

Said government knows that if Serco were to be told it’s toast and there will be no more work for it, like our plumber’s business, things could easily get messy. Memories of the mess that was created by Carillion’s collapse, and the problems that have been created by the financial difficulties its peers have encountered, are still fresh.

The last thing ministers currently need is another too big to fail outsourcing company going pop.

So Serco will roll on. It will be able to declare the fine as an “exceptional item” in a future results statement, which the City will ignore because its analysts and investors much prefer to look at operating profits and future prospects. Serco’s should be fine with the government’s taps remaining on.

It is true that DPAs are cost effective. Fraud trials are ruinously expensive, they can drag on for months, even years, and big businesses have the resources to outgun the SFO courtesy of the best legal help money can buy. Defence lawyers are adept at blowing smoke at juries, which is partly why fraud prosecutors have such a spotty record. The individuals involved in the affair may still face justice.

But if companies know there is a get out of jail at a discount rate, where’s the deterrent?

There will always be people in business who cut corners, or worse. Part of the reason for their doing that is because they know the consequences to their employers are limited. As this episode demonstrates.