By Christine Murray
LONDON (Reuters) - Britain's Serious Fraud Office (SFO) has opened a criminal investigation into G4S (GFS.L) and Serco's (SRP.L) electronic monitoring contracts, increasing pressure on the embattled contractors.
The SFO investigators will now decide whether to take the companies to court after an audit showed that, under a 2005 government contract, they charged for tagging criminals who were either dead, in prison or had never been tagged.
The investigation could ultimately lead to fines or prosecution and neither G4S nor Serco can win further British government work until the completion of a second investigation by the Cabinet Office into every deal it has with the companies worth more than 10 million pounds ($15.9 million). The result of that investigation is expected by the end of November.
Britain's Ministry of Justice says that it spent 107 million pounds on the two tagging deals with the companies in 2012/13.
Since the scandal first broke in May, both companies have lost their chief executives, launched their own internal inquiries and begun top-down reorganization.
Both companies said that they will cooperate fully with the SFO investigation.
Serco faced allegations in August of fraud on a contract for prisoner escort services, resulting in some staff members being referred to the police and the contract being placed under Ministry of Justice supervision.
The government has asked Serco to prove that it has overhauled its corporate practices or face being barred from future government work.
G4S and Serco compete against each other in Britain, Australia and New Zealand to run prisons, tag criminals and escort prisoners to and from court. They also come up against Sweden's Securitas (SECU-B.ST), the world's second-largest security company behind G4S, and French-listed Sodexo (SW.PA) when bidding for criminal justice work.
Though G4S and Serco cannot sign new contracts, they are allowed to bid for future work. Both are believed to be interested in probation services contracts worth about 500 million pounds in total.
Serco is the preferred bidder to run three prisons in Yorkshire, with the award depending on the outcome of the investigations.
The Shadow Justice Secretary, Labour's Sadiq Khan, said that the government should not allow G4S to win any further contracts until the SFO has completed its investigation - a process that can take years in some cases.
G4S earns about 10 percent of its annual revenue from British government contracts, against about 25 percent for Serco.
To prosecute the companies, the SFO must show that the boards of directors were complicit in wrongdoing; a much higher burden of proof than that required by equivalent U.S. agencies.
SFO director David Green called in October for a law change to allow the body to prosecute more companies.
Among recent high-profile investigations of large government contractors was that into defense supplier BAE Systems (BAES.L), which paid the SFO 30 million pounds in 2010, along with $400 million to the U.S. Department of Justice, to settle a long-running corruption investigation.
New G4S Chief Executive Ashley Almanza will update investors on Tuesday with details on his turnaround plan for the company. Almanza intends to sell non-core parts of the group and restructure its European operations.
Speculation that this might lead to a break-up of the group cooled last week when G4S rejected a $2.5 billion offer for its cash security arm, saying that the business is integral to its strategic plans.
Shares in G4S were down 0.1 percent at 1403 GMT, against a 1.1 percent fall for Serco shares and a 0.4 percent gain for the wider FTSE all-share index. ($1 = 0.6281 British pounds)
(Additional reporting by Neil Maidment; Editing by David Goodman)