Two former executives at outsourcer Serco were accused of perpetrating a “fraud on the taxpayer” by concealing £12m in profits related to a contract for the electronic tagging of offenders, on the first day of a trial brought by the Serious Fraud Office.
Former Serco executives Nicholas Woods and Simon Marshall appeared at Southwark Crown Court on Tuesday to face charges of fraud and false accounting in relation to the tagging of offenders between 2011 and 2013.
The trial is the culmination of the SFO’s long-running investigation into the way in which senior employees of Serco — one of Britain’s largest outsourcers — allegedly defrauded the government out of many millions of pounds.
Woods and Marshall, former finance director of Serco Home Affairs and operations director of field services respectively, allegedly devised a scheme with another employee to understate the true profitability of the company’s contract in financial models submitted to the government.
“The false representations as to costs were made in order to conceal Serco’s high profit margins and so stop the [government] from taking steps to recover any of Serco’s previous profits or otherwise reduce the revenue stream that Serco obtained,” the SFO’s barrister Michael Bowes QC told the jury in opening statements.
“This is about a fraud on the taxpayer, on public funds, carried out by the defendants to benefit Serco, a company which employed them.”
Woods and Marshall are charged with one count of fraud for dishonestly filing a misleading financial model to the Ministry of Justice on August 11 2011 along with another person, who is not named. Marshall also faces two other counts of fraud relating to untrue or misleading models filed to the government on June 6 2012 and January 18 2013.
The alleged scheme involved Serco’s subsidiary Geografix — which manufactured and leased electronic tagging equipment — charging £500,000 each month to Serco that was “completely fictitious”, according to Bowes. The costs were listed as pertaining to consulting, salaries and maintenance among other things.
Serco paid the sums to its subsidiary, which later returned the full amount as a dividend, overall artificially depressing the profits attached to the contract by £12m between October 2010 and September 2012, according to the SFO. The actual profits earned were just over £27m, rather than just over £15m, as stated.
“These false costs were included in the financial models sent to the MOJ that purported to represent true and accurate equipment, salary and overhead costs . . . This had the effect of falsely inflating those costs categories thereby artificially and dishonestly reducing the reported profit and so the profit margin,” said Bowes.
He said the true scale of the fraud could not be measured because the MOJ had never been able to amend Serco’s fees, meaning it was “not possible to quantify with certainty the precise financial gain to Serco or loss to the MOJ.”
In the financial model filed in August 2011, the fake management fees had the impact of reducing the company’s profit margin from a range of between 5.31 per cent to 35.67 per cent, down to a reported range of -13.62 per cent and 21.22 per cent over a six-month period.
Bowes said the two defendants knew the costs filed were “not true and accurate” and “acted dishonestly”.
The trial continues.