Serco practice of moving profits within group ‘legitimate’, argues defence lawyer

Serco’s method of transferring profits between its business units for its prisoner tagging contract was “not very admirable” but “lawful . . . legitimate accounting”, according to a lawyer for a former director charged with fraud. 

Nicholas Woods and Simon Marshall, lawyers for ex-executives of the UK government contractor, told Southwark Crown Court on Wednesday that financial models submitted to the Ministry of Justice in 2011-13 contained true and legitimate charges and were not part of a scam. 

The Serious Fraud Office has accused the men of defrauding the government in relation to Serco’s lucrative contract for the electronic tagging of offenders by confecting fake charges in order to conceal profits worth some £12m.

The SFO alleges that Woods and Marshall, along with another unnamed employee, devised a scheme in which Geografix, a Serco unit that manufactured and leased prisoner tagging equipment, would levy £500,000 a month in “completely fictitious” charges against the UK contractor.

The alleged aim was to keep Serco’s profit margin low and avoid raising questions about whether it was delivering value for money to the ministry, according to the SFO. Geografix allegedly paid back the full amount at a later date by way of a dividend.

Barrister Neil Saunders told the jury that Woods, an accountant and former finance director at Serco’s home affairs division, believed all the charges to be legitimate and had no motive to conduct a fraud on behalf of his employer.

Serco was making money in two places simultaneously . . . I’m not here defending the practice. I’m saying the practice is not suggested to be wrong. It’s lawful, it’s legitimate accounting

He said Serco’s method of paying charges to its subsidiary Geografix in order to depress its profit margin was legitimate and commonly used by large companies as a means of shifting profits within a group. It was also sanctioned by Serco’s senior managers, Saunders said. 

“Large companies conduct business by moving profits within a group. It is a legitimate and lawful practice,” he said, later adding: “The instruction from some of the most senior executives in the company . . . was to maintain Serco Limited’s profit margin at a particular level using the mechanism of charges levied by Geografix.”

Adrian Darbyshire QC, the barrister defending Marshall, formerly Serco’s operations director of field services, said: “If you’re sitting there thinking, this is a bit off, sticking the money in your subsidiary simply to reduce the profits you’re making in the [prisoner tagging] contract, I know at least one person who would agree with you.

“The reality was, in this contract, that Serco was making money in two places simultaneously . . . I’m not here defending the practice. I’m saying the practice is not suggested to be wrong. It’s lawful, it’s legitimate accounting.”

He added: “it may not be very admirable or the right way to treat your customer . . . ”

Woods and Marshall are charged with one count of fraud for dishonestly filing a misleading financial model to the ministry on August 11, 2011 along with another person, who is not named.

Marshall faces another two counts of fraud relating to untrue or misleading financial models filed on June 6, 2012 and January 18, 2013. Both deny the charges against them.

The case continues.