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Tesco And Fraud Office Hold Talks Over Deal

Tesco (Xetra: 852647 - news) has been holding secret talks with the Serious Fraud Office (SFO) about a deal to settle a criminal probe into the accounting scandal which last year triggered the biggest crisis in the retailer's history.

Sky News has learnt that the SFO and Tesco have been in discussions about the possibility of signing a deferred prosecution agreement (DPA), which would involve a court-approved deal under which the company would admit wrongdoing but avoid any immediate criminal sanctions.

It (Other OTC: ITGL - news) was unclear on Tuesday when the talks between the two sides began or whether they remain active. A number of sources suggested that they were ongoing but at a preliminary stage.

The talks between Tesco and the SFO follow public suggestions from David Green, the SFO director, that the UK's first DPA would be announced by the end of this year.

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Other companies to have been in contact with the agency about such a deal include Barclays (LSE: BARC.L - news) , which is under investigation for the way it raised money from Gulf shareholders during the 2008 financial crisis.

Corporate lawyers suggested that any agreement between Tesco and the SFO could also entail the installation of an independent monitor who would supervise the preparation of the company's accounts for a specific period.

The SFO's inquiry was launched after it emerged that there was a £263m shortfall in its profits - a figure that was subsequently revised upwards to £326m.

Tesco attributed the problems to irregularities relating to supplier payments.

The Financial Conduct Authority, swiftly followed by the SFO and Financial Reporting Council, launched inquiries into the affair.

News (Other OTC: NWSAL - news) of the developments in the SFO's investigation comes the day before Dave Lewis, Tesco's chief executive, updates the City on his progress in turning around the retailer's fortunes.

Analysts expect operating profit for the six months to August to be in the region of £400m, less than half the £916m it reported in the same period last year.

For the year to the end of February, Tesco recorded a loss of £6.4bn, one of the biggest in UK corporate history.

Mr Lewis's predecessor, Philip Clarke, was ousted in the summer of 2014 following a string of profit warnings and slump in its market share amid intensifying competition from the discounters Aldi and Lidl.

City sources said that Mr Clarke was interviewed under caution by SFO investigators about ten days ago ‎as part of its probe.

An interview under caution means that testimony can be used in evidence during any future trial.

The fraud office indicated earlier in its inquiry into Tesco that it was likely to take around a year to complete, meaning that it is conceivable that an outcome could be made public by the end of the year.

Sources said that the SFO's investigation was focused on a trading update issued on 29 August, 2014 which stated that trading profit for the six months ending 23 August 2014 was expected to be in the region of £1.1bn.

Mr Lewis took over from Mr Clarke three days later, and soon after a whistleblower highlighted concerns about Tesco's accounting.

The SFO is said to be examining whether senior executives were aware that revenue from future trading periods would have to be recognised prematurely in order to meet that revised figure.

Tesco and the SFO both declined to comment on any discussions between them.

Last month, Tesco announced that it had sold its operations in South Korea for £4.2bn as it seeks to strengthen its balance sheet.

Tesco is also expected to decide to retain control of Dunnhumby, its customer data unit, after failing to secure a sufficiently attractive offer from a buyer, although the company refused to comment.

On Tuesday, it announced that it was overhauling the way it pays suppliers in an attempt to improve transparency at a time when it is also under investigation by the Groceries Code Adjudicator.

Under the new terms, suppliers which deliver up to £100,000-worth of products in a year will be paid within 14 days.

Those which deliver up to £10m in product value each year will have their accounts settled five days quicker than larger suppliers in their category, according to the company.

"By introducing a new standardised policy across each category for our larger suppliers, and shorter payment terms for our small and medium suppliers, it will help us to deliver a fairer, more transparent and consistent approach across our supply base," Mr Lewis said.