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").
To view the article in full, please see below:
Full Article
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").
Background
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.
Significance
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.
Conclusion
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 www.law-now.com/law-now/mondaq
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.