Serco a high-risk client with history of failures, offshore law firm found

Appleby, at centre of Paradise Papers leak, ran risk assessment before agreeing to help firm set up holding company in Mauritius

A Serco van and photographers
Allegations against Serco of fraud and covering up abuse were flagged by the law firm Appleby. Photograph: Reuters/Guardian Design Team

An offshore law firm regarded Serco, a company that runs sensitive government services in Australia and the UK, as a “high-risk” client, expressing concern about its “history of problems, failures, fatal errors and overcharging”, the Paradise Papers reveal.

Chief among the law firm’s concerns about Serco were allegations of fraud, the cover-up of the abuse of detainees, and the mishandling of radioactive waste.

The concerns are outlined in the Paradise Papers, based on millions of documents from two offshore service providers and the company registries of 19 tax havens, which were obtained by the German newspaper Süddeutsche Zeitung and shared by the International Consortium of Investigative Journalists with partners including the Guardian.

They have prompted Serco’s critics to question the appropriateness of having the company provide critical services on behalf of the Australian and UK governments.

Serco runs 11 of Australia’s onshore immigration detention centres, including on Christmas Island, and is regularly contracted for defence projects.

It has been asked to provide 250 staff to Australia’s troubled phone support system for welfare recipients, and will build and run the country’s largest private prison, in Grafton, New South Wales. Elsewhere, it runs private prisons in Western Australia and Queensland, provides non-clinical services in hospitals and is building Australia’s next Antarctic discovery vessel, or icebreaker, which it will go on to operate.

The company was founded in the UK, where it is based, and had revenues of £3bn last year. In Britain, it operates six adult prisons and the Yarl’s Wood immigration detention centre, helps manage healthcare facilities and provides critical support services to the military.

Serco first approached Appleby through a London law firm on 1 September 2015, asking for help to “establish a subsidiary in Mauritius to acquire 49% of a company in Abu Dhabi”.

It would later use the Mauritius company solely to facilitate part of a major sale of its business interests in the Middle East and India.

The immigration detention centre on Christmas Island
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The Serco-run immigration detention centre on Christmas Island. Photograph: Scott Fisher/Getty Images

Serco has flatly denied that the structure was used to help it avoid tax, and the Guardian is not suggesting the company acted unlawfully in any way.

The request prompted a flurry of activity within the Appleby compliance arm. The team began running its standard checks on the risks Serco could pose as a client.

The results were less than convincing. Appleby’s compliance team found what they described as a “history of blunders and controversies surrounding many of its contracts”, including through its involvement in Obamacare and the running of prisons in Australia and New Zealand.

“It has a history of problems, failures, fatal errors and overcharging,” a senior Appleby compliance officer wrote.

At the time, the company was under investigation by the UK’s Serious Fraud Office for billing the government for the electronic monitoring of criminals who were either still behind bars or dead. It paid back £68.5m to the government over the scandal, but was later cleared of fraud.

Serco, it was noted, was part of a consortium the UK’s Office for Nuclear Regulation had accused of breaching its responsibilities for the handling of radioactive waste. It had also presented false data to the NHS 252 times, was accused of fraudulent record keeping and had allegedly manipulated results when it failed to meet targets, the compliance team warned.

“The company is alleged to have covered up the sexual abuse of immigrants in Yarl’s Wood removal centre,” the compliance officer wrote.

The compliance team’s final view was that caution ought to be exercised against taking on Serco. But, if it decided to push ahead, Appleby must ensure there was a “legitimate rationale” for Serco’s operations in Mauritius. The company generated income in Baghdad, Namibia and the Philippines, and its transactions should be closely monitored, Appleby’s compliance team said.

“There is a lot of bad publicity related to this group that increases the exposure to risk. Although a listed company, the world check hit [results from a global business intelligence database] and controversial issues surrounding Serco cannot be disregarded,” the compliance officer wrote.

“We need to consider whether we would be in a position to manage these risks. If this business is to be accepted, it will be very important to ensure that there is a documented sound and legitimate rationale for what they are doing and why they are doing it in Mauritius, and also how the risks would be mitigated.”

The risks were not enough to dissuade the law firm from agreeing to take on Serco.

A Serco spokesman said it was “hardly a secret” that the company encountered challenges in 2013. Those challenges prompted a major programme of corporate renewal, he said.

“The success of this programme is evidenced by the fact that governments in the US, UK and Australia have all awarded and renewed major contracts with Serco to manage highly sensitive public services,” the spokesman said.

At the time it approached Appleby, Serco was keen to stop providing outsourcing services to private businesses, and instead focus its efforts on the public sector. The restructure was designed to exit a loss-making and non-core part of Serco’s business.

The front entrance to Yarl’s Wood immigration removal centre
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The front entrance to Yarl’s Wood immigration removal centre in Bedfordshire. Photograph: Robert Oates/Alamy

It decided in early 2015 to sell off its private-sector outsourcing companies in India and the Middle East, and eventually found a buyer in Blackstone, which committed £250m for the sale.

Appleby’s role related to the sale of a Serco company in the United Arab Emirates, named Serco Business Services. The law firm helped create an investment holding company in Mauritius, which would take a 49% stake of Serco Business Services, the maximum allowed under UAE foreign ownership laws.

The Mauritius company was wholly owned by a British holding company, Serco Holdings Ltd. When the UAE business was eventually sold, it resulted in a £10.5m payment to Serco from the private equity firm Blackstone.

Serco then forwarded £500,000 to a local firm, which held a 51% stake in the UAE business. The payment appears to be the result of UAE’s business ownership laws, which mandate that locals must have a majority stake in foreign companies operating within its borders. The majority stake gave the local firm the ability to block the sale if it so desired.

A Serco spokesman said the Mauritius company was set up on request by the buyer of its UAE business. “At the request of the acquiring company, Serco transferred the shares in a UAE-based business to Mauritius as part of the sales process,” he said. “Serco gained no tax or any other benefit from this arrangement.”

Mervyn Morris, an expert on UAE business at Queensland University of Technology, said the ownership laws were designed to preserve the role of UAE nationals in the economy. Morris said it was unlikely the sale of Serco’s UAE entity would have attracted tax in the emirates, even if the Mauritius company were not created.

“Although there are officially company taxes in the UAE, rarely are they applied to anything except the petroleum businesses – so it is very unlikely any taxes would have been payable by the UAE company,” Morris said.

The revelations have prompted renewed criticism about the awarding of sensitive government contracts to Serco.

Colin Penter from the citizen-led group Serco Watch said: “There’s a sort of intentional blindness to the history of the company.

“Their performance, their record of delivery, is so poor, across a full spectrum of the contracts that they deliver. You just have to look at New Zealand in terms of prisons; if you look here in Western Australia in relation to hospitals or prisoner transport. If you look at immigration detention. It’s just disaster after disaster.”

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