UK: Dividends At Stake As SFO Expects Investors To Monitor Conduct Of Portfolio Companies

Last Updated: 25 January 2012
Article by Omar Qureshi

On 13 January 2012, Director of the Serious Fraud Office ("SFO"), Richard Alderman gave a stark warning to shareholders and investors in companies found guilty of corruption. His announcement followed an agreement with Mabey Engineering (Holdings) Ltd to pay over £130,000, representing sums it received through share dividends derived from contracts won through unlawful behaviour by its subsidiary company, Mabey & Johnson Ltd ("M&J").

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On 13 January 2012, Director of the Serious Fraud Office ("SFO"), Richard Alderman gave a stark warning to shareholders and investors in companies found guilty of corruption. His announcement followed an agreement with Mabey Engineering (Holdings) Ltd to pay over £130,000, representing sums it received through share dividends derived from contracts won through unlawful behaviour by its subsidiary company, Mabey & Johnson Ltd ("M&J").


M&J were in the business of exporting pre-fabricated bridges to developing countries. Between May 2001 and November 2002, M&J entered into an agreement with the Iraqi Government to facilitate the avoidance of UN sanctions by allowing it indirectly to access funds held in a UN controlled account. By facilitating the avoidance of the sanctions, M&J secured a contract with the Iraqi Government worth over €4.2 million.

An internal investigation ensued and in 2008, M&J reported the irregularities to the SFO. Following an SFO investigation, M&J pleaded guilty to charges of corruption and breaches of the UN sanctions in September 2009 (both in respect of the Iraqi contracts and other acts of impropriety in Jamaica and Ghana). Two of M&J's former directors and a sales manager have since been convicted for related offences.

As a penalty for its conduct, M&J was ordered to pay over £6.5 million in fines, costs and reparations. This sum was comprised of £3.5 million in fines, over £1.4 million in reparations, a £1.1 million confiscation order and the SFO's costs.

Mabey Engineering (Holdings) Ltd, M&J's parent company, has now agreed to pay over £131,201 to the SFO, which represents dividends that it received from M&J as a result of the contracts it obtained in breach of the UN sanctions. A civil recovery order requiring the payment was approved by the High Court under Part 5 of the Proceeds of Crime Act 2002 ("POCA").

Civil recovery under Part 5 of POCA is a statutory scheme for the recovery, in civil proceedings, of property obtained through "unlawful conduct", whether or not criminal proceedings are ever brought and/or convictions ever obtained. Importantly, the standard of proof required for the court to grant a civil recovery order is the civil standard, i.e. that on "a balance of probabilities" the matters alleged to constitute unlawful conduct occurred. If this standard is met, the SFO would be entitled to recover "all property wherever situated", including money, real property, personal, heritable or moveable property. This scheme could be used to recover money or property received as a result of a bribe, money laundering, tax evasion and a number of other illegal activities.

There are, however, some restrictions on such recovery. The court may not make a recovery order where it would not be just and equitable to do so and if all of the following conditions are met: (1) the defendant received the property in good faith; (2) he took subsequent (or pre-emptive) steps in relation to the property that he would not otherwise have taken if he had not obtained it; (3) he was not aware that the property was recoverable; and (4) recovery of the property would be detrimental by reason of the steps he took in relation to that property. In making its determination, the court must have regard both to the degree of detriment to the defendant and to the SFO's (or other relevant authority's) interest in receiving the realized proceeds of the property.


Whilst this is the first time the SFO has sought to recover dividends received by a shareholder, it has previously sought to recover money put aside for dividend payments in the future, which represented the benefit from criminal conduct. In February 2011, the SFO obtained a High Court order requiring M.W. Kellogg Limited to pay over £7 million, representing share dividends due, together with interest accrued on them. The dividends comprised profits from contracts in relation to the Bonny Island liquefied natural gas plant in Nigeria, which were obtained through bribery.

Perhaps the greatest significance of the present Mabey case lies in the words of Richard Alderman, commenting on the matter, where he highlighted that the SFO would not hesitate to pursue investors in companies to recover dividends paid as a result of corrupt behaviour:

"There are two key messages I would like to highlight. First, shareholders who receive the proceeds of crime can expect civil action against them to recover the money. The SFO will pursue this approach vigorously. In this particular case... the shareholder was totally unaware of any inappropriate behaviour...

The second, broader point is that shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in. This is very important and we cannot emphasise it enough. It is particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recovery process to pursue investors who have benefited from illegal activity. Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect."

This begs the question: what level of due diligence conducted by shareholders and investors would satisfy the SFO? In many cases, shareholders and investors are likely only to have access to information in the public domain. Internal failings regarding bribery and corruption may not be publicised to actual or potential stakeholders, let alone the wider public. It would be a surprising statement from the SFO to suggest that the average shareholder in a listed company (as opposed to parent companies or controlling owners) was somehow expected to monitor and oversee the conduct of the companies in which they invest. This could have very significant ramifications for individual shareholders, as well as institutional investors.

However, at an event held by Transparency International on 18 January 2012, Mr Alderman clarified his statement and explained that his comments were aimed at "shareholders who realistically have power to influence the behaviour of the companies in which they invest". The focus would be on institutional investors and other major shareholders in companies, i.e. those who are more than just the recipients of dividends. Essentially, the SFO would target those shareholders or investors that have access to the management of their investee companies and are able to ask and monitor whether those companies have adequate anti-bribery procedures in place and if not, question why not. The SFO see this as part of the duty of such investors – to exercise their influence over the management of portfolio companies for the benefit of society as a whole and the savers who have invested their money with those institutional investors. As Mr Alderman noted, savers with institutional investors would expect those investors to ask questions about governance in areas that can affect the reputations of the portfolio companies and the value of the investment. The focus then, when considering recovery of dividends paid by corrupt companies, will be on institutional investors (in large, listed companies) and major shareholders (in smaller, private companies). It would seem that, in making these comments, the SFO considers such investors' conduct to be relevant to the question whether it would be just and equitable to allow recovery of the dividends.


Mr Alderman has sent a strong message that the SFO will be vigorously pursuing any ill-gotten gains, specifically where the financial benefit of improper conduct has been transferred to influential shareholders and investors by way of dividend payments.

What is clear is that under POCA, the SFO is prohibited from bringing civil recovery action in respect of property which has already been taken into account for the purposes of a confiscation order obtained during criminal proceedings. Therefore, if the turnover received from a contract procured by bribery were entirely recovered from the criminal company through a criminal confiscation order (along with potentially very substantial fines), the SFO would not be free to pursue shareholders for civil recovery of dividends that represented, in part, the profits earned on those same illegal contracts.

Regardless of the above, Mr Alderman's indication of the SFO's future approach could potentially have a very significant impact on the behaviour and expectations of institutional investors investing in corporates found guilty of corruption, particularly in relation to major infrastructure or energy projects where the dividends earned may be very substantial, but also substantially recoverable by the SFO. This appears to be the SFO's intention. Add to that the potential impact on the value of the investor's investment, when the investee company has been stripped of turnover from its improperly obtained projects and fined sums possibly in the "tens of millions" (see Thomas LJ's comments in R v Innospec Ltd [2010] Lloyd's Rep FC 462 and our LawNow "Innospec sentencing: SFO plea deal went too far" here), together with the reputational damage and possible further ramifications (such as debarment) that may ensue, and those considering investing in corporates with an uncertain ethical culture or operating in the highest risk sectors and countries may start to think again, or at least demand improvements in the corporate governance of the potential investee – an additional form of policing of corporate anti-bribery procedures that the SFO would no doubt encourage.

How this could impact on the market capitalisation of household name companies found guilty of corruption in future is difficult to predict. Perhaps the restrictions contained in POCA (referred to above, but not relied on in the instant case) may serve to limit the risks for significant shareholders that the SFO's approach would otherwise suggest. However, institutional investors in particular should be mindful of the SFO's statements in this regard. To the extent they are not doing so already, such investors should raise issues regarding anti-bribery procedures in their management discussions with portfolio companies, to ensure they have protected against the attendant risks to their investment.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 19/01/2012.

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