A lot of press attention has been directed to the recent defeat of the Serious Fraud Office (SFO) in the Court of Appeal in its attempt to prevent a company under investigation from relying on litigation privilege to withhold documents. Less attention has been paid to an arguably no less significant victory for the SFO in the same week in another case.
The claim involved a U.S. company with subsidiaries in many countries including the U.K. The company concerned is currently under investigation in the U.S. by the Department of Justice and the Securities and Exchange Commission for alleged Foreign Corrupt Practices Act (FCPA) violations concerning the use of an agent, Unaoil Group Holdings, in respect of certain projects in Kazakhstan and Azerbaijan.
Indeed the U.K. operations of the U.S. company were already under investigation by the SFO. It was in the context of those investigations that a meeting had been arranged at which the SFO expressly asked for representatives of the U.S. parent to be present. During the meeting the U.S.-based General Counsel of the company was personally served with a Section 2 notice under the Criminal Justice Act.
These notices are powerful weapons enabling the SFO to obtain almost any documents relevant to their inquiries. Crucially, the term “documents” for this purpose is construed widely and includes any which are held on computers. In this case, the notice had been tailored to request documents to the extent “….that such materials have not already been produced to the SFO by KBR UK….” The U.S. company cried foul. It argued that the service was invalid and that the SFO’s powers did not extend to U.S.-based companies in any event.
The Court rejected these arguments and the judgment can be found here. For a full account of the reasoning see the excellent piece by law firm CMS. After a careful review of the relevant case law, the Court roundly rejected the argument that the SFO’s power to serve notice for the production of documents under Section 2 could not have extra territorial effect. As the Court observed, to have decided otherwise would have allowed respondents to ignore notices where the relevant documents were simply stored in computer servers located abroad. Instead it decided that:
“…. a careful consideration of the context, the underlying policy considerations and the overwhelming case for s.2(3) having at least some extraterritorial application, would compel the answer that there was no jurisdictional bar precluding the SFO from giving a notice to any foreign companies in respect of any documents held abroad, regardless of their relevance to an investigation into a UK company, and regardless of the degree of connection between the foreign company, the UK and a UK company.”
Elaborating on this principle, the court went on to say that while the precise ambit of extra-territoriality was impossible to define, some “sufficient connection” with the U.K. was required and that perhaps factors similar to those used in insolvency cases where similar jurisdictional issues sometimes arose could serve as a helpful guide. These included:
- Residence and place of business of the defendant
- The nature and purpose of the transaction in question
- The nature and locality of the property involved
- The circumstances in which the defendant became involved in the transaction or received benefit from it
- Whether the defendant acted in good faith
In this case, the Court found there was a sufficiently clear link between the activities of the U.S. parent and those of the U.K. subsidiary under investigation. It also found that, while the means by which the service of the notice was effected in this case might be thought “unappealing,” it was not invalid.
The means by which the SFO served notice in this case may give foreign-based companies (including parent organizations) pause for thought. The SFO chose not to signal its intent before serving the Section 2 notice on the general counsel of the parent at what was expected to be a routine meeting in the course of their investigation. This tactic will not have escaped notice of other foreign-based companies which are perhaps in the SFO’s line of fire. We should also not lose sight of the fact that the ruling has implications for U.K.-based companies with documents located abroad. Any doubt as to whether Section 2 notices would apply to such documents has now been resolved in the SFO’s favor.
Finally, you may be wondering what are the chances that you will find yourself on the wrong end of a Section 2 notice. The troubling news here is that the number of such notices issued by the SFO has more than doubled in the last five years and for 2017/2018 stands at 1,032.