05 May 2017

In 2014, Tesco Stores Limited (a UK subsidiary of Tesco PLC) gave a false account of its performance. The company admitted deliberately overstating its profits by £326 million after incorrectly booking payments from its suppliers. This led to the Serious Fraud Office (SFO) launching an investigation into Tesco’s accounting practices.

As part of the investigations, three former Tesco executives, accused of fraud, are due to stand trial in September 2017.

The Deferred Prosecution Agreement

The Deferred Prosecution Agreement (DPA), which received judicial approval on 10 April 2017, suspends prosecutions in respect of the 2014 mis-statements, by providing terms of settlement between Tesco and the SFO. Should Tesco fail to fulfil conditions of the DPA, prosecution may resume.

Due to the live proceedings concerning the three former Tesco executives, reporting restrictions prevent the judgment, the DPA and the statement of facts being published. However, we understand the following:

  1. Tesco will pay a fine of £129 million.
  2. Tesco has agreed with the FCA’s finding of ‘market abuse’ in relation to the trading statement which overstated the Group’s profits.
  3. However, there is no admission by Tesco that it or any of its employees committed a criminal offence.

The Financial Conduct Authority (FCA) has also stated that it is not suggesting that the Tesco board of directors "knew, or could reasonably be expected to have known" that the information in the company’s trading statement was false or misleading.

It is not yet fully clear whether the DPA deals with any liability attaching to Tesco PLC or any employee or agent of Tesco PLC or Tesco Stores Limited. Tesco PLC stated that judicial approval of the DPA, and compliance with its terms, will conclude the SFO's investigation into "Tesco". It could be assumed that this refers to the entire group and could suggest that no further action will be taken against Tesco PLC.

Shareholder agreement

As well as the DPA fine, Tesco has also agreed a compensation scheme with the FCA to pay £85 million to investors who were affected by the inflated figures. The fine, compensation payments and costs are set to total £235 million.

The compensation scheme will cover investors who bought shares or bonds in Tesco Stores Limited between 29 August and 19 September 2014. Such purchasers will be entitled to compensation of 24.5p a share plus interest at 1.25% for institutional investors, or 4% per annum for retail investors.

This is the first time that the FCA had used its regulatory power to require a listed company to pay compensation for market abuse.

Some shareholders have brought claims against Tesco in relation to the matter. Most of these have been settled with modest sums.

What does this tell us?

This is the SFO’s fourth DPA since the agreements became available in 2014, for fraud, bribery and other economic crime. However, it is the first DPA that has been used in respect of criminal activity other than bribery. This demonstrates that DPAs are being used as a key enforcement tool, to promote a culture of self-reporting and co-operation, and to redress corporate offending out of court.

The SFO is now developing benchmarks for discounts applied where particular levels of co-operation are reached and expect sentencing guidelines to be applied in full where there is no co-operation. This demonstrates the SFO's standpoint between incentivising businesses to openly address bribery and corruption, and appearing tough enough on businesses which break laws and commit these offences.

Further, it shows that DPAs are now firmly part of the corporate criminal enforcement landscape. The SFO’s Joint Head of Bribery and Corruption, Ben Morgan, recently described DPAs as "the new normal" for resolving corporate economic crimes.

Practical tips

Co-operation is key to obtaining a DPA. The court must be convinced that approving a DPA is in the interests of justice. The SFO can only do this with co-operation. Accordingly, businesses should be prepared to consider providing the SFO with full access to witnesses and non-privileged documentation in order to be able to demonstrate full cooperation.

Self-reporting is also clearly encouraged. However, following the Rolls-Royce DPA, it no longer appears that self-reporting is an essential prerequisite for a DPA. This is because Rolls-Royce did not self-report until around two years following its discovery of the corrupt activity in its business.

How can we help?

If you would like help with any of the above, please contact our fraud and white collar crime team.

Key contact

Paul Haggett

Paul Haggett Partner

  • General Counsel
  • COLP/MLRO
  • DPO

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